Personal Pensions

This is the main reason personal pensions work. Pay £80 into a personal pension and the provider claims £20 from HMRC on your behalf, so £100 lands in your pot. That is basic rate relief and it happens automatically.

If you pay income tax at 40 or 45 per cent, you claim the rest through your self assessment tax return. It does not arrive in the pension. It reduces your tax bill or widens your basic rate band, and a lot of higher rate taxpayers simply never claim it. If that is you, you can normally go back four tax years.

Scottish taxpayers have different bands and rates, so the relief works out differently. We deal with that properly rather than assuming the rest of the UK position applies.

There are two limits and you need to stay inside both.

• You can get tax relief on contributions up to 100 per cent of your relevant UK earnings in the tax year. If you have no earnings at all, you can still pay in £3,600 gross a year, which costs you £2,880.
• The annual allowance is £60,000, counting your contributions, your employer’s, and the tax relief. Go over it and a tax charge applies to the excess.

Carry forward

If you have not used your full annual allowance in the three previous tax years, you may be able to carry the unused amount forward. You need to have been a member of a registered pension scheme in those years, and your own contributions are still capped by your earnings this year. This is what makes a large one-off contribution possible after a good trading year or a bonus.

If you are a high earner

The annual allowance is tapered for people with adjusted income over £260,000 and threshold income over £200,000. It falls by £1 for every £2 of adjusted income above £260,000, down to a floor of £10,000. Both income figures are defined in a particular way and include employer contributions, so the calculation is worth doing carefully rather than estimating.

If you have already taken taxable pension income

Once you have flexibly accessed a pension, the money purchase annual allowance replaces the standard one and limits you to £10,000 a year into money purchase pensions, with no carry forward available. Taking only tax-free cash does not usually trigger it. Taking taxable income from drawdown does.

The label matters less than what sits underneath, but broadly there are three.

• Stakeholder pensions, which have capped charges and a short, simple fund range. Cheap and adequate, and often the right answer for a modest pot.
• Personal pensions from insurance companies and platforms, with a wider fund choice and a range of charging structures.
• Self-invested personal pensions, which open up direct shares, investment trusts and commercial property. More flexibility, usually higher costs, and only worth paying for if you will use what you are paying for.

We look at the total cost of ownership rather than the headline annual management charge, because platform fees, fund charges and adviser fees all come out of the same pot.

You can normally access a personal pension from age 55. That minimum age rises to 57 on 6 April 2028, so anyone born after early April 1971 should plan around 57 rather than 55.

Up to 25 per cent of what you take can usually be paid free of income tax, subject to an overall lump sum allowance of £268,275 unless you hold one of the older forms of protection. The rest is taxed as income at your marginal rate in the year you take it. You do not have to take it all at once, and for most people that is exactly the point.

From there the options are drawdown, an annuity, lump sums, or a combination. We cover those on the income drawdown, annuities and phased retirement pages.

We are based in Taunton, have advised families across Somerset and the South West since 2000, and are directly authorised by the Financial Conduct Authority under firm reference 624976. Being directly authorised and independent means we research the market rather than working from a restricted list.

Most first conversations cover what you already hold, what you are trying to get to, and whether a personal pension is the right vehicle at all. Sometimes an ISA does a better job for money you may need before 55. We would rather say that at the start than sell you the wrong wrapper.