It will be beneficial to make a list of the different workplace and private pensions you may have and who provides them. This is key to understanding how much you might expect to receive.
You may receive more than one type of workplace pension in retirement. There are two main types of pensions, known as Defined Benefit Schemes or Defined Contribution Schemes. It is important to know which you have:
Defined Benefit (DB) schemes provide a secure income that is paid throughout retirement, together with the option to take a tax-free cash lump sum on the date you retire. As a member of one of these schemes, there are two ways you may have built up benefits.
Whilst the way benefits are built up varies between schemes, the principle of a CARE scheme is that the pension income you build up is based on your pensionable salary each year. Each year’s benefits are then adjusted for inflation and added together to provide a secure income in retirement.
Different pension schemes use different methods of calculating your ‘final salary’. However, benefits calculated in this way will usually provide you with an income in retirement. This is based on your final pensionable salary when you leave the Scheme, or when your membership of the final salary section ends. Most DB schemes no longer provide final salary benefits and are now CARE schemes.
The University provides the Universities & College Retirement Savings Scheme under this type of Defined Contribution Scheme.
In this type of scheme, you and your employer will normally make contributions that are invested, tax-free to build up a pension pot for you. The rules of the pension scheme will set out the contributions you can make from your salary each month together with the contributions from your employer. For example, 5% from you, 10% from your employer.
The size of your pension pot will depend on factors such as:
In the graphic below, the piggy bank represents your pension. It shows your contributions, your employer’s contributions and the pension being invested tax-free. Under current rules, you could take up to 25% of that pension pot tax-free from age 55, the rest would be used to provide an income. You have a number of choices on how to do that.
Additional Voluntary Contributions (AVC’s) are a way of building up a pot of money, in addition to your DB pension. The money can be used to generate a pension income or to provide a lump sum at-retirement. It may be possible to receive part or all of these savings tax-free at-retirement, depending on which pension scheme you are in.
The graphic below shows how AVC contributions could add up:
Assumptions
The table below shows the tax treatment applicable to each type of pension scheme.
Click on your chosen pension scheme to increase your AVC pot and find out more:
*AVCs are made into Investment Builder section of the scheme.
In April 2016, the State Pension changed to a new single tier State Pension known as the new State Pension, still based upon National Insurance (NI) contributions. There is a deduction for individuals who were contracted out of the Additional State Pension.
In reality, not everyone is eligible for the maximum amount of the new State Pension. Therefore, it is important to check your State Pension record and NI contribution history early. To receive the full new State Pension, you normally require 35 years of NI contributions.
Visit http://www.gov.uk/check-state-pension to find out what your new State Pension amount is currently (based on your NI record to date). Below is an example of what you may see. It shows your forecast based on completing an expected number of years NI payments and an estimate based on your current record.
If you have any gaps in your National Insurance record you may still be able to make up the difference. You can request a State Pension statement using a BR19 form, available online or by calling the government helpline on 0345 3000 168.
You don’t have to claim the State Pension as soon as you reach State Pension age. You can defer it to increase the amount you receive at the agreed later date. However, you should consider all options before making your decision.
Under the current law, the State Pension age is due to increase to 68 between 2044 and 2046. However, following a recent review, the government has announced plans to bring this forward and the State Pension age would therefore increase to 68 between 2037 and 2039.
To find out your State Pension age please click here.
HMRC limits the tax efficiency offered by pensions in two ways:
The AA is based on your earnings for the year and is capped at £40,000 while you’re still working and reduces to £4,000 if you’ve started drawing a pension. This is called the Money Purchase Annual Allowance (MPAA). If you exceed this allowance you won’t get any more tax relief and you will be charged an Annual Allowance charge which can be applied for through scheme pays, see below for more details.
If you’re a member of a DC Scheme this is simple to work out and can be achieved by looking at your contributions for the year. If you’re in a DB scheme this can be a little more complex to work out. Your AA is tested against the increase in the value of your retirement benefits each year, if you have a significant salary increase in a particular year you may be at risk of exceeding the AA. If you believe you may be affected by this, please contact your Scheme administrator.
Tapered Allowance
For high earners, (i.e. those with an Adjusted Income over £240,000) the AA may be reduced. A calculation is required to determine an individual’s Adjusted Income figure. This is a complex calculation but broadly speaking, will include an individual’s taxable income from all sources plus the value of the pension they build up during a tax year. For every £2 an individual’s Adjusted Income exceeds £240,000, their AA is reduced by £1 up to a maximum reduction of £36,000, this means that the AA would reduce to as low as £4,000 for those with an Adjusted Income of £312,000 of above.
It is important to be aware that, in addition to the Annual Allowance, HMRC restricts the amount of tax relief that can be received each year on pension contributions. This limit is up to the greater of 100% of relevant earnings or £3,600.
Lifetime Allowance (LTA)
The LTA is the total value of your pension savings (excluding the State Pension), before a tax charge is applied.
The LTA is £1,073,100 for the 2021/22 tax year. So the total you can receive without incurring a Lifetime Allowance charge amongst all your pensions is this amount.
If certain criteria is met, it is possible to receive protection against previous reductions to the Lifetime Allowance. Subject to being awarded this protection, this would mean you could have a higher Lifetime Allowance limit.
Further information about Lifetime Allowance protection is available by visiting www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance
How is this calculated?
DC schemes are valued using the actual monetary value of the pension pot.
For DB pension schemes it is calculated by multiplying your expected annual pension by 20. In addition, you need to add to this the amount of any tax-free cash lump sum if it is additional to the pension.
If you exceed your LTA the excess will be subject to a tax charge:
For more information on the Annual Allowance or Lifetime Allowance click the links to visit the government website.
Salary sacrifice is where you agree to exchange part of your salary so you can get extra benefits from your employer. In terms of a pension, this can mean reduced tax and NI. With salary sacrifice, an employee agrees to reduce their earnings by an amount equal to their pension contributions, in return the employer will make the total pension contribution – meaning no further tax relief can be claimed on pension contributions.
Salary sacrifice can give you the same amount of contributions for a lower overall cost, or a higher level of contributions for the same overall cost.
Whilst salary sacrifice has many benefits there are also considerations. One of which is that once you perform a salary sacrifice your overall pay is lower, so this can affect factors like applying for a mortgage or your employee benefits. You also don’t receive the government contribution towards your pension as you’ve already received tax relief upfront.
If you have less than 2 years membership of a DB scheme if you leave you are not entitled to a refund of contributions.