Understanding UK pensions

Whether you’re looking forward to lounging around with a cocktail and a good book on a sunny European beach, or you simply plan on moving into a snug country cottage with your other half, it’s always good to plan ahead for your retirement.

And if you’re thinking about retirement, that means doing a bit of financial planning to ensure you have the necessary savings to fund your retirement plan, which also means it’s impossible not to consider pensions.

But if you’re new to the world of work and still fairly young, you might not have put too much thought into how exactly you might fund your retirement, or even what your retirement plans might be.

If this is the case, don’t worry. It will likely be many decades before you ever need to consider withdrawing your pension, though it is important that you understand and start contributing to your pension as soon as possible to maximise its value.

So, to help you get a better understanding of what pensions are, and how they work, we’ve broken down this complex topic into key areas of note, all of which you can find further down and on our pensions hub

What is a pension?

At its most basic level, a pension is simply a tax-efficient, long-term saving plan that you, your employer, and the government can contribute to over the course of your working life. You can then withdraw this pot of funds upon reaching the age of retirement and spend it how you see fit.

In essence, a pension is a way to ensure that you have at least some money to live on once you stop working, allowing you to maintain the standard of living you’re used to while still enabling you to explore the world and make the most of your newfound free time.

However, most pension plans and pots don’t contribute enough money on their own to facilitate retirement plans.  As soon as you are able to, it is a good idea to increase your monthly contributions to ensure you are on track to meet your retirement goals – the sooner you do this, the more money you’ll be able to save overall.

How do pensions work in the UK?

Although the prospect of saving for retirement early can be somewhat intimidating, there’s not a lot you need to consider once you’ve reached out to a pension provider and set up your preferred type of fund.

If you’re employed, then your employer should automatically enrol you into a pension fund, which you can then pay into directly from your salary. Normally, you can adjust your monthly contributions, increasing or decreasing the standard amount to your preference. If you’re lucky, your contributions will also be matched by your employer up to a point.  Alongside this, you’ll likely also be able to withdraw a small amount of your state pension each month after you hit the eligibility threshold.

Generally speaking, in most cases, once a pension pot has been created, it will sit untouched to accrue additional funds and interest, leaving you with a sizable sum of money once you elect to stop working and reach the age level for withdrawal.

This is why it’s so important to start saving for your pension as soon as possible to ensure you retire with a sizable pot. Even a small contribution will be helpful as it all adds up in the end, and you can always increase your level of contribution down the line.

How do private pensions work?

Outside of government and work pensions, it is possible to set up a pension plan of your own with a pension provider. These require you to make regular pension payments yourself, a percentage of which the government might match, before allowing you to access them after a set period of time.

This is just the most basic form of private pension, and there are many more variations out there that you might want to consider. For more information on these, why not visit our page on the different types of pensions to find out which type might be best suited for your needs?

How do I set up a pension?

Setting up a pension is usually a very simple process. As we’ve already mentioned, employees are automatically enrolled on their company’s pension plan, and state pensions are guaranteed after certain conditions are met.

To set up a personal pension outside of these, however, you’ll need to do a bit of research to determine what provider is right for you. This may include looking at the fees they charge, the limits on how much money you can pay in, their different withdrawal offers, and whether or not you can combine existing pensions together.

If you do have any questions about what goes into setting up a pension, it’s recommended that you speak to a financial expert, such as those on our team here at Blacktower.

How do I access my pension?

Unlike most other savings accounts, to access the money in your pension pot, you must be of a certain age – though not necessarily retired.

For state pensions, the government requires you to be 65 years of age and an eligible citizen, though this age is likely to increase in the future. As for most other types of pension, you can usually access them by the age of 55, though this will be governed by the rules of your pension plan.

However, while you can withdraw your pension at these predetermined ages, you should ideally wait for as long as possible before touching your pot.

Relying on other savings means you can leave your pension to accrue further value, giving you a greater sum upon withdrawal. You might even want to keep working after you reach the minimum pension age, in which case, it’s usually best to leave your pension untouched to get the most out of it.

How do I know how much my pension will pay out?

What your pension pays out will be entirely dependent on the schemes you’re enrolled in. Government pensions pay out a set amount about every four weeks, while all other pension types can be withdrawn in a variety of ways.

Most pensions allow you to withdraw a 25% lump sum straight away that is not subject to tax, after which, all other withdrawals will then be taxed to some degree. The larger the sum you take out after the 25%, the higher the tax rate that will be applied to it.

If this is not to your liking, you could instead invest your pension in an annuity. This guarantees you an income for life using the value of your pension. Or, alternatively, you may decide to set up your pension as a flexible access, drawdown account that pays out a set monthly income from your pension.

Like the different types of pensions available, there are many options for withdrawal that you can take advantage of, so, again, it’s best to enlist the aid of a financial advisor.

Can I withdraw my pension early

Whether or not you can withdraw your pension early is down to the discretion and rules laid out by your provider, though there may be exceptions to these rules depending on your circumstances.

Most people consider it unwise to withdraw your pension earlier than necessary, as this often incurs a hefty financial penalty.

How do UK pensions work aboard?

Although there are a variety of financial hurdles associated with moving abroad, gaining access to your UK pension is not one of them. So long as your provider can pay into an overseas account, or your annuity fees can be transferred without charge, you’ll likely face little issue accessing your pension.

In most cases, you’ll also be able to withdraw your state pension without issue as well, and you may even be eligible for the state pension of your new country of residence on top of this.

For ease of access, it may be recommended to you that you transfer your pension to a Qualified Recognised Overseas Pension Scheme (QROPS), to ensure that everything is kept simple.

With all that said and done, it is worthwhile bearing in mind that you will likely still have to pay UK tax on your pension, and perhaps more tax overall depending on the tax laws of the country you now live in.

These are just the basics when it comes to understanding pensions and if you desire a more thorough understanding of the topic, we recommend visiting our pension’s hub [3] page for information on topics such as pension tax relief and annual allowance.

And if you plan to move abroad in the future, don’t forget that the team at Blacktower handle more than just pensions for expats. From wealth management to international mortgage solutions, and everything in between, get in touch today to see how our team can help you.

This communication is for informational purposes only based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained  in this communication is correct, we are not responsible for any errors or omissions.