saving into a pension

How much should I save?

This all depends on two things

1. how much you’d like to have in the future and
2. how long there is to save for before you might need the money.

Once you have an idea of this then this can be calculated for you.

But in reality the amount you can afford to save will probably change from year to year. Pay rises and paying off loans may leave you able to save more. Work uncertainty and family expenses may leave you feeling poorer.

It is best to save an amount you can afford, knowing you are in full control of your savings. You can increase or decrease or even pay in lump sums at any time.

What makes saving into a pension special – the good bits

A pension has one great advantage over other ways to save, called tax relief.

What this means is for every £8.00 you pay in the government pays £2.00 in for you as well.

• You don’t need to have an income, or even be paying tax to pay into a pension. All UK residents can pay in up to £2,880 a tax year and the government will pay in up to £720 for you too.
• Great if you are taking time out of work to care for your family, or even if you are wanting to save for a child or grandchild of any age.
• And if you pay tax at the higher 40% or additional rate 45% then you can claim additional tax relief through your self-assessment.
• Investments within the pensions grow largely free of taxes, leaving more money in the pension to grow. This is the same as ISAs.

Pensions are now flexible!

Pension flexibilities are a new thing, and these flexibilities apply to both new pensions you start, and can apply to existing personal pensions you already have. If you need us to check whether your existing pensions are flexible we can!

Flexible means

1. Flexible timing

Once you are 55 (rising to 57 from 2028) you can access your pension fund at any time.

Remember that the longer your money is invested the greater potential it has to grow. It you don’t need it yet, it’s probably best to leave it.

You don’t need to retire to access your pension.

Remember if you have other income that’s taxed you will find the pension income will be taxed too. If you have sufficient income it’s probably best to leave your pension fund alone to a time when your other income is lower.

If you find you have sufficient income from other pensions, savings or inheritances, you don’t have to access your pension savings at all.

They will stay invested, nicely enjoying no capital gains or income tax on any investment growth. After you are 55 (rising to 57 from 2028) they will always be available for you to access whenever you need them. Or you can even leave them to be transferred to someone else after your death, without them forming part of your estate so avoiding any inheritance tax. The whole pension fund can be inherited tax free if you died before age 75.

At Sapphire Financial Planning we can give you a personal plan explaining what your options are and what is best for you.

2. Flexible tax free cash

You can take a lump sum from your pension fund without taking an income.

Generally you can take 25% of your pension fund as a lump sum without paying any tax on it. The remaining money will stay invested and be available to pay an income to you when you need it.

Taking money from your pension fund will reduce the amount left to give you an income. Although there are no restrictions on taking the tax-free cash, we can help you manage this as part of your retirement income. The tax-free cash can then be used as a source of tax-free income at the start of your retirement.

Alternatively you also have the choice to use your 25% tax free cash spread across the pension income you receive. This means for every £100 income you take, £25 is tax free. This option may be more suitable for you.

At Sapphire Financial Planning we can give you a personal plan explaining what your options are and what is best for you.

3. Flexible income

Some people want their pension income to be fixed and guaranteed and the option to do this is still available through an annuity. The pension fund is no longer invested and the income depends on the annuity rate.

For people who want their pension fund to continue to be invested whilst receiving a pension income, this option is now available. The income received can still be set as the same level, or can be changed at any time if less or more income is needed. If you use this option, you can use your fund at any time to switch to an annuity, at a time when annuity rates may be higher due to economic conditions or because you are older.

The main difference is the investment in the pension fund isn’t guaranteed so take too much income and the fund may run out!

At Sapphire Financial Planning we can give you a personal plan explaining what your options are and what is best for you.

Pension – the bits to be aware of

With all the extra money the government pays in, they have placed some restrictions on how the savings can be used.

These restrictions may not be a problem for you, fitting well with your retirement plans. But if they don’t fit with your plans then an alternative way of saving may be better for you.

The following are features of personal pensions. If you have a pension through work then you may find they have different features, do check your pension paperwork for the details.

• You can normally access your pension savings from age 55 (rising to 57 from 2028).
• The maximum pension tax relief you can receive on your contributions is up to 100% of your UK earnings, not exceeding your pension annual allowance which can be up to £60,000 per year. If you are wanting to pay in more than this we can help by looking at any unused allowances from previous years.
• ISAs offer an alternative way of saving free of capital gains and income tax which can be accessed 100% tax-free before 55 (rising to 57 from 2028), although they don’t benefit from the governments tax relief when you pay money in and the annual maximum to invest is currently £20,000 (tax year 2024/25)
• Pension income that you receive is taxed as your income. If all your income is less than your personal allowance (currently £12,570 in the 2024/25 tax year) then your pension will be tax free. However remember to count any state pension you may receive as this counts towards your annual allowance too.

At Sapphire Financial Planning we can give you a personal plan explaining what your options are and what is best for you.