How to make the most of your pension

Clare Moffat: Hi, I'm Clare Moffat and I'm Royal London's Pension and Legal Expert.

Sarah Pennells: And I'm Sarah Pennells and I'm the Consumer Finance Specialist here at Royal London. And in today's webinar we're going to be talking about how to make the most of your pension. So we'll start with a quick recap of the basics of what a pension is. We'll talk about how much to save in your pension and importantly how your pension can save you tax. Now, we had a staggering 546 questions submitted ahead of this webinar so, first of all, a huge thank you if you did submit a question. But obviously we're not going to be able to answer all of them in the next 45 minutes or so. Now, Clare and I would like nothing better than to talk about pensions non-stop for two days, but you may have other things to do.

Now we have read every question, and what we're going to do is answer some of the most popular questions in this webinar, but we would still like you to submit some questions and I can see some of you already have been. We have left some time at the end to answer questions that come in. As with all of our webinars, though, we can't answer your specific circumstances and we can't talk about a Royal London policy. So if you have a comment or a question, please make it using the Slido app or link now. One more announcement to make which is that a reminder that we are recording this webinar and we will be sharing a link to the recording with everybody who registered in the next day or so.

So let's start with the basics, Clare, let's get on with it. What is a pension? And by that I mean what makes something a pension rather than a different kind of savings or investment plan?

Clare Moffat: Well, it's a really good question. The purpose of a pension is to provide money when you've stopped working or perhaps before this, but you must be 55 or over currently to be able to take out any money from your pension. Now that age is rising to 57 by April 2028. Now a pension is different to other types of savings or investments plans because of the way it's taxed. Now we'll be talking about how pensions can save you tax later on, but in broad terms the government gives you a tax top up on the money you save into your pension, and you're allowed to take out some money tax free. Now under the rules you can only take money out of your pension before the age of 55 in very limited circumstances. So normally if you're very ill or perhaps in certain specified jobs where you are allowed to retire early.

And it's those rules that make a pension different from something like, for example, a stocks and shares ISA.

Sarah Pennells: So that's what a pension is but I suppose we should explain about the two different types of pension as well.

Clare Moffat: Yes, you might have heard the words, 'Defined benefit.' Now that's the type of pension that makes a promise to pay you a regular payment for the rest of your life. Now that would start when you stop working. A final salary pension is one type of defined benefit pension but there are other types as well. You might have heard of, 'Career average,' as well. Now if you retire and you have a defined benefit pension, well it's almost like carrying on getting your monthly salary, except you'll get less, of course. And you can take some tax-free cash too. Also, if you have a husband or a wife who is alive longer than you, then that payment will normally carry on for their lives too. Now these days you're more likely to see defined benefit pensions in the public sector, although lots of people have some definite benefit pensions from the past.

The second type of pension is called a defined contribution pension. So that's the type of pension that pension providers offer to you individually or through your job. Now these are pensions where you build up a pot of money and then you use that money to give you an income to live on when you retire but you can take out some money before you stop working if you want to.

Sarah Pennells: Now you may have noticed that we haven't mentioned the State Pension and there's a very good reason for that. That's because in our last webinar in December we spent almost an hour talking about and answering your questions on the State Pension so there's a link to that webinar on this page. Now before we go any further I think it's time for our first poll. So, what we'd like to do is ask about the type of pension or pensions that you have. Whether you've got defined benefit pension or pensions, defined contribution, a mix, or you're not sure. So please vote using Slido.

Okay so at the moment, Clare, 'Not sure,' is actually the most popular answer, so 36-, it's changing as I'm speaking but 36, 35% saying not sure. About a similar number, 32% is saying defined contribution and about 27% saying both. Only 4% defined benefits so-, I mean I think it's interesting that so many people aren't quite sure what kind of pension or pensions they have. Maybe not that surprising because many people may have had pensions over a number of years and may not have actually checked for a while.

Clare Moffat: And that's right, especially if you've left an employer. You might remember who you've worked for, you probably will remember who you've worked for, but you might not remember the type of pension scheme that you had and it's probably only as you get closer to retirement you think about that a little bit more. And, you know, we will still see people that do have a mixture of both. In years to come that won't be as common, but you know, it is more common now. Now of course the reason we asked this question, well it's because we are going be mainly focused on defined contribution pensions and some of the key features in relation to them, rather than defined benefits. One of the key features with a defined contribution pension is that you're in control of how your pension contributions are invested. But there's a lot of confusion about what exactly happens to your pension money and it's something we had a lot of questions about.

Sarah Pennells: Yes, we absolutely did. Including this question from Philip, who says he's just joined his employers pension scheme and how does he find out where his money is invested? Now we will answer your question, Philip, but I think before we do that we'll do a quick explainer of what happens to your pension money. So, the money that you pay into your pension and money that comes from your employer into your pension, if you're in a workplace pension scheme, together with the government tax top up of tax relief, that's all invested, all invested into-, in funds. And these funds in turn invest in different assets. So they may buy the shares of a range of companies for example, or they may buy company bonds which effectively means loaning the company's money. Or government bonds if they're buying them from the UK government, they're called gilts. Or other assets including things like commercial property. If you're in a workplace pension-, and this is a really important point, unless you actively decide where your pension money is invested, then it will be put into something that is called the default fund.

Clare Moffat: Yes, the make up of these default funds-, well it varies from one pension scheme to another. But the idea is that it meets the needs of most of the members of the workplace pension scheme. Now the vast majority of workplace pension scheme members have their money invested in the default fund. So if you're happy to have your money there then you don't need to do anything at all. But you don't have to keep your money in the default fund.

Sarah Pennells: No, that's absolutely right. So, you can switch money that's in your pension to other funds within your workplace pension if you prefer and you can choose those funds. So that's something that you can do yourself and switch some or all of your money. Now if you want to switch funds within your workplace pension, then you won't normally be charged if you're doing this. I think it's really important, though, to think about if you want to switch your pension money, about the risk that you might be taking in terms of the funds that you might want to move your money too, compared to the risk that might be associated with where your money is at the moment. And I think that risk is one of those things that-, it can be quite tricky to talk about when we're thinking about it in relation to money. How much risk someone might be comfortable taking.

Now the idea behind taking more risk, putting your money into a riskier fund, is that you have the potential for higher growth, but you do also have the risk that there's a higher chance that your pension will lose money as well. So, there's that thing around the comfort level that you have about the risk that fund or funds might be taking, but it's also important to think about how far away you are from retirement when you might want to access your money. Because that could also affect the amount of risk that you're actually able to take. And this is why it's an important decision and it's a really good idea to talk to a financial adviser, this is something they can really help you to think through and talk through. Now we do know that not everybody has a financial adviser so we've got an article on our website about how to find a financial adviser. It talks about the, kind of, different questions you might need to ask or think about in your own mind and also some adviser directories.

We've also got information on our websites about pensions and investment funds, but there's also an article on the MoneyHelper website which is government backed website about pensions and investment funds and the address of that website moneyhelper.org.uk

Clare Moffat: Philip wanted to know how he could find out where his money is invested, so what's the answer?

Sarah Pennells: Well, there are three different ways that you can find out where your pension money is invested. So, first of all your annual pension statement so, you know, the statements get sent once a year as the name implies, and they have information about how much you've paid into your pension, how much your pension is worth but also where it's invested, the different fund or funds that your pension money is invested in. So that's a good place to look. Now if your pension provider has an app then they may list the funds that your pension money is invested in and that can be really hand if you're the kind of person who wants to check on your pension you can do it, obviously, whenever you want to. But also if your pension has an online portal then you can login there and, again, as well as your contribution details, it will have information about the investment funds that your pension money is in.

Right time for another poll, I think. So, this time-, we've asked you about the kind of pension or pensions that you may have, this time we'd like you to tell us whether you know how much you're saving into your pension each month. So please vote now.

Okay this is really interesting, so we're getting at the moment about half and half of people saying they know to the penny, and people who are saying they have a rough idea. About one in ten, nine percent, are currently saying, 'Not a clue,' and about five percent are saying they're not currently saving into a pension. Is this what you expected, Clare? What do you take from these results?

Clare Moffat: Yes, because I think some people will know the fixed amount that's going in, but some people might-, it's a-, it might be a percentage. So, and especially if you've got, kind of, fluctuating salary, perhaps. You know, different salary every month then there could be a different amount going into your pension every month, but it's really encouraging to see that people-, you know, a lot of people do have a rough idea as well as people, kind of, know to the penny as well. And you know, as you say it's really interesting because even if you do know exactly how much you're saving into your pension every month, you might not know whether that's enough for retirement. And that's something we had a lot of questions about, including one from Anthony who asked how much he should be paying into his pension so that he has enough to live on. Now Sarah, we know money is really tight for a lot of people at the moment, so how much should people aim to pay into their pension?

Sarah Pennells: It's a really good question from Anthony, and as you said, we had some others who also submitted a very similar question, so thanks for that. And there isn't an answer, unfortunately, in a way, of one, sort of, single figure of, 'This many pounds a month.' I think if you are thinking about how much to save into your pension, then it is really helpful to think about your end destination. So, in this case, think about retirement, think about the kind of life that you'd live in retirement and really think about it in some detail. So how will you spend your time when you're not working, or when you're not working so much? Are you the kind of person who wants to travel a lot? Do you want to travel to far flung places? Or are you somebody, 'That just isn't important to you'? Do you want to take up some new and possibly expensive hobbies, or are you happy with your existing possibly expensive, possibly not, have-, hobbies? How do you imagine spending your time? A really big important expense is your mortgage or rent.

Will you still have a mortgage when you retire? If so, what's that likely to be? How many years will you have that for? If you're renting, likewise. Is your rent going to be similar to now? Could it be less? Is it going to be more? Even if you don't have a mortgage, if you're going to be retiring and your mortgage will be fully paid off, is your home the kind of property that could be a money pit in terms of repairs and improvements. Or even if it's not the case, are you the kind of person who likes to redecorate regularly and spend money on your property or does that really leave you cold?

The next stage is to think about when you retire. And again, I think it can be helpful to shift how you think about stopping work, because I talk to lots of people who say, 'You know, I really love my job, I don't really want to retire until I'm in my late 60s, even 70s.' But sadly not everybody is going to be able to carry on working until their late 60s or 70s, even if they want to. And retirement isn't just about, 'This is the life you have after you decide that you have to stop work,' retirement enables you to have a life without having to work to pay the bills. You can stop work if you want to, or you can carry on working, it's up to you. But what retirement enables you to do, is to not have to work to pay those bills.

Clare Moffat: So, what about those people who love numbers? Should they start somewhere else?

Sarah Pennells: Yes, that's a really good point. And in that case I think the starting point is to look at what you'd have to live on if you didn't have any pension at all. So that's going to be the State Pension and once you know what the State Pension will pay you, then I think you can work out whether that's enough to give you the kind of life you'd like in retirement or whether you're going to have to have more into your pension to give you a good standard of living in retirement. So, let's talk about the new State Pension. That is currently £9,660 a year, per person if you have a full National Insurance record. And that's gonna rise to £10,636 from April the 6th. Now, that works out at £805 a month, currently, or £886 a month from April. Now, if you joined the State Pension webinar, you will know that I tried to live on the State Pension for a week last year, along with some of our customers. I took the State Pension challenge. And I have to be honest and say I didn't find it easy. Apart from having to watch my spending even more closely than I currently do, I realised that there was just no stack in the system, certainly for me, and that was quite stressful.

And I did the challenge in summer, when I didn't have the same, kind of, you know, heating and winter bills that we're all facing at the moment. But even if you are happy to live on the State Pension amount on its own, or largely on its own, then there's a question about whether you're happy to wait until the earliest age at which you can get your State Pension before you stop work. So, currently, the State Pension age is 66. So, that's when you can get your State Pension. But it's rising to 67 and is, by 2028, and is due to rise to 68 later on. So, the two questions that follow up from that, how much more do you want to have saved in the State Pension amount? And how much earlier do you want to retire than the State Pension age, and when you're allowed to claim your State Pension?

Clare Moffat: And should people be focusing on the age they want to retire or the type of lifestyle that they'd like to live?

Sarah Pennells: Well, I, I'd personally say both. I mean, I think if, if you're the kind of person who wants to have a really comfortable lifestyle, you know, you want to travel a lot, you want to eat out, you want to, maybe, leave money for your children or grandchildren, then that's going to have a really big impact on how much you need to save for your retirement, compared to somebody who doesn't have those, doesn't really want to live like that. But, obviously, it will also be affected by when you want to retire. You know, whether you want to retire at 55 or at State Pension age. Obviously, as I mentioned, one of the biggest expenses is going to be your mortgage or rent. So, that's going to be a, a huge one to factor in. So, I think it's maybe time for another poll, Clare.

Clare Moffat: Yes. We've been talking about how to think about what you might need in retirement. So, let's think about that in a little bit more detail. So, if you were thinking about your life and retirement now, which of these is the closest to how you imagine it? Now, obviously, everyone's got very different ideas, but try and pick an answer that's closest to what you think a good retirement looks like. Okay. So, lots of people want three weeks' holiday in Europe and replacing their car every five years. So, I'm not surprised by that. Are you, Sarah?

Sarah Pennells: No. I think we've-, this is a really interesting one because I think when you ask people to think about their retirement and you give them a choice, which is, kind of, basically, not being able to spend so much money on food, not being able to spend so much money on clothes, on, on birthday presents, on, you know, whatever it is, and, and not much on holidays or transport, not surprisingly, people do go for the more, sort of, comfortable end, in terms of retirement. But, yes, so it's settled on 50% at the moment saying, you know, basically, 'I'd like this three weeks' holiday in Europe and replacing my car.' About four in ten, though, are saying, 'Actually, I'd be quite happy with two weeks' holiday in Europe and I'm not so bothered about replacing my car that frequently.'

Only 4%, so fewer than one in twenty are saying, 'No car and holidaying in the UK.' And it's-, the reason we ask this is that there's a really useful website called retirementlivingstandards.org.uk which we've added the link to, and that website will really tell you how much you need, as an annual income, depending on the kind of-, kind of retirement that you'd like. So, it's based on independent research, and if you go to the website you'll see, next to each different income level, what that will buy you. And I think it's important to say that the numbers on the retirement living standards presume, first of all, that you don't have any housing expenses at all.

So, no mortgage or rent. And they presume that any money you have from your pension is, has been, the tax has been paid, and any money that's coming out of your pension. Now, if you're happy with what they call a minimum lifestyle standard of living, and we found that only 4% of people in our poll were, but if you live on your own, then you'll need £12,800 a year. And to give you a bit more of an idea of what that includes, you'll be able to have a weekend and weeks' break in the UK every year. Spend about £54 a week on food, and up to £60 a month on clothes and shoes. But as we've said in the poll, you wouldn't be able to run a car.

Now, for a moderate lifestyle, you'll need an income of £23,300 a year for a single person. For that, you'd spend a bit more on food. £74 a week. £65 a month on clothes and shoes. Go on holiday to Europe for two weeks of the year. And if you want the comfortable lifestyle, and we've found that about half of you said, 'Yes, please.' Then you'd need an income of £37,300 a year for a single person. And, as well as the car that we mentioned, three weeks' holiday in Europe, but also, you can afford, as well as spending more money on things like food, and clothes, and birthday presents, you'd be able to replace your kitchen or bathroom in your home every ten or fifteen years.

Now, I do think this is one thing that's really, really good about the retirement living standards website because you can just go through and look at, actually, what you'd like. And they're very, sort of, tangible examples. And I think it really does help to bring to life what retirement at different income levels could look like.

Clare Moffat: And if you're part of a couple, those figures rise, but they don't double. And that's because it's cheaper for two people living together than for two people living on their own. So, for a moderate lifestyle, instead of £23,300 pounds a year, you'd need £34,000 for a couple. And you can see on screen there the number for minimum and comfortable too. Now, you might be wondering how much you need to save to get to those amounts, and, and that depends on a lot of factors. There's a really handy pension calculator on the MoneyHelper website that Sarah mentioned earlier. And it looks at, for income retirement, but then looks at your salary now, pension contributions that you're making, your employer's making, what your State Pension age will be. And it works out if you'd have a shortfall.

So, you plug in the numbers. You'd like to retire at 65, for example, and it helps you, kind of, work out if that's achievable or what you would need to do to help that. But Sarah, we know that some people are really struggling with the cost of living, so they might be thinking about stopping or reducing their pension contributions. So, so, what should they think about?

Sarah Pennells: Well, you know, you might expect someone from a pension company to say, 'Don't think about stopping or reducing your pension contributions.' And, on one level, that, sort of, is what I'm going to say and, and the reason is that I think the first reason is that we know most people don't save enough money for their retirement. Now, that's not a judgement. That's just what the research shows us. So, they don't save enough for the, kind of, you know, a good standard of living when they stop work. The second reason, though, is that if you're employed, then you're in a work, and you're in a workplace pension, then, that means you'll be giving up your employers' contributions into your pension.

But also, tax relief, the tax top-up from the government as well. Now, we know that some employers, quite a number of them, won't just contribute on a, kind of, standard level or basis. They will do something that's called matching or matched contributions. And this means if you want to pay more into your pension, they will match the, the money that you pay in. Now, obviously, I'm very aware we're in the middle of a cost of living crisis, and we know that millions of people are really struggling with day-to-day bills. So, this may be not the time you're thinking of paying more money into your pension. But it is worth checking with your employer for, you know, when those bills do start to come down and you may find that you have some spare money because, as I've said, they well match your contributions.

Now, if you are struggling to pay your household bills, then it definitely could make sense to reduce or pause your pension contributions. I did mention, there, that one of the reasons not to stop paying into your pension is the employer contributions but also the tax relief. And we got a lot of questions about tax relief, including ones from Laura and Richard and they want to know, 'What is tax relief? How does it work?' So, Clare, what's the answer in more detail?

Clare Moffat: Okay. So, let's have a look on screen about how, how tax relief works. Now, it's worth seeing, at the outset, that the principle of tax relief is the same across different types of pension schemes. But the way it works in practice can vary. Now, if you pay £80 into your pension, and you're a basic rate taxpayer, then the government will top that up by £20. So, £100 will go into your pension. Now, if you're a higher or additional rate taxpayer, then you'll get extra tax relief. So, an extra £20 and an extra £25. You'll get at the higher rate of tax, and so, that brings the tax relief. You can see the example for a higher rate taxpayer there.

But, and, you know, this is an important point to make, you may either get that extra tax relief, so that extra if you're a higher or additional rate taxpayer automatically, or you might have to claim it back from HMRC. So, if you're paying into an individual pension or, or some types of workplace scheme, then you'll get that same 20% or 25% tax relief. Sorry, same 20% basic rate tax relief, but you'll have to claim that extra twenty or 25% from HMRC. Now, you can do this in a tax return, if you fill one in, or you can phone them up. Don't miss out on money in doing this, and lots of people do miss out on this.

So, it's one to be aware of. However, some employers operate slightly differently. So, if they operate a scheme called salary exchange, or sometimes called a salary sacrifice, and we're going to come back to this a little bit later on about how that works. Now, your pension contributions are taken off your salary before tax is paid. Now, in that situation, or if it's a type of pension like a, a public sector pension scheme, or another type of scheme where it's also taken off before tax, then if you're a higher or additional rate taxpayer, you don't need to claim anything back because you're getting the benefit of the full amount of tax relief immediately.

Sarah Pennells: So, I think the message there is if you are a higher or additional rate taxpayer, then it's important to check if you do have to do something to get all that tax relief back or you might be losing out. Now, if you're in a workplace pension scheme, then your employer has to pay something into your pension as well. So, you have the benefit of the tax relief and that money from your employer. But Clare, one of the other features of a pension is that there are limits on how much you can pay into it each year. Now, pensions aren't the only kind of investment that have these annual limits, you know, ISAs do as well, for example. But how does it work if you have a pension?

Clare Moffat: Yes. And we've had lots of questions on this as well, including from Michelle who asks, what's the maximum lump sum she can pay in. So, for most people who are employees, the maximum that they can pay into their pension and get that government top-up tax relief is their earnings. So, if you earn £20,000 a year, then, theoretically, the most that you could pay in and get tax relief is £20,000 a year. But if someone isn't working then they can still pay £2,880 a year into a pension, and they'll get a 20% top-up as well. So, that means they would have £3,600 going into a pension.

Now, anyone can have a pension, even children. Your pension provider might have an app that shows you the amount of tax relief that you're getting from the government, and that's interesting to look at, but one thing to mention is that if it's a salary sacrifice or a salary exchange scheme, it might not be as obvious to see on an app, but you are still getting the benefit of the tax relief because you're not paying tax on that money.

Sarah Pennells: But if you're watching this in Scotland, then there are-, there are different tax rates, aren't there?

Clare Moffat: Yes. There are different rates of tax in Scotland, so you might be paying more tax than in the rest of the UK. Now, if you're a higher rate or an additional rate taxpayer, then these tax rates are increasing, again, on the 6th of April this year by 1%. However, the more tax you pay, the more relief you get. So, that actually means more money in your pension. So, in Scotland, if you're a higher rate taxpayer, you, you will be paying 42%, but instead of getting 40% tax relief, you'll be getting 42% tax relief.

Sarah Pennells: Now, Clare, you mentioned salary sacrifice a moment ago. And again, we had quite a few questions on this, including one from Kate, who wants to know, 'Is salary sacrifice something that's always offered?' I think before we answer that, well, just to explain a wee bit more about salary sacrifice. Now you, you described it as salary sacrifice or salary exchange. It's, it's known as both of those things. And, in a way, salary exchange is a-, is a better description because what you do is you give up, essentially, or exchange a percentage of your salary and that money is then paid into your pension by your employer. They pay that money into your pension on your behalf.

So, you're not actually sacrificing it because you are exchanging it for something in return. Now, doing it this way means that you can save National Insurance which is, of course, just another tax. And that means more money can go into your pension. So, you know, you could either, if you switched into a salary sacrifice, you could either carry on saying, putting in the same amount into your pension, which actually means more money would go into your pension, or, and if you could prefer, you could set it up so the same goes into your pension, and in that case, you'll end up with slightly more take-home pay.

Now, using salary sacrifice means that there would have to be a change to your employment contact, and there are some circumstances where salary sacrifice can't be used, or isn't a good idea. So, for example, you can't use salary sacrifice if it means that your wages will be taken below the minimum wage. Now, for the majority of people, though, salary sacrifice is definitely worth considering. But if your employer offers this, then they'll be able to let you know the circumstances where it's not a good idea. Now, if you receive a bonus through your work, then you can use bonus exchange, if your employer offers that, and that works in the same way.

So, kind of, back to Kate's original question which is, 'Is this something that's offered everywhere?' The answer is no. It's not necessarily something that all employers offer, although a number of them do. But there are tax advantages for employers as well. So, if your employer doesn't offer salary sacrifice, it's definitely worth asking if they consider it.

Clare Moffat: Yes, we've had a question from Ioli and a couple of other people about moving overseas. Now, the question asked was, 'If I leave the country and don't come back, can I get my pension money back?' Well, the whole pension, including any tax relief and employer contribution can usually be moved to something called a qualifying recognised overseas pension. Now, that's a pension in another country which HMRC feels operates in a similar way. Now, you can sometimes leave your pension here and your pension could be paid to an overseas bank account, but you know, in both of these situations, I would say that financial advice is key because you're dealing with different jurisdictions and there are different tax issues in different countries.

Sarah Pennells: Now, Clare, we just talked a bit about how much you can pay into your pension in relation to your salary, but if you're in the fortunate position of earning say, you know, £100,000 a year, £50,000, whatever it is. Could you pay all of that into your pension, assuming that you could afford to?

Clare Moffat: Well, in theory yes, but there might be some tax consequences of doing that. So, so, let's talk about something called the annual allowance. Now, the first thing to say is that the annual allowance will not impact most people in the UK, but it's worth explaining how it works because it is being mentioned in the press a lot just now. Now, the annual allowance is a limit on how much money can go into your pension in any one tax year, without paying a tax charge. It's not the maximum pension contributions that you can make, which, which we spoke about earlier and it's really easy to confuse these two situations.

You could still pay more than the annual allowance if you have those earnings to support it, but you would have to be taxed for the amount over the annual allowance. And the annual allowance is currently £40,000 for most people. So, in that example of someone earning £100,000 for example, they'd be able to pay £40,000 of their salary into their pension, in the current tax year without a tax charge, but there is tax concession, and you'll see on the right of the screen there. There's something called carry forward. Now, you can use this if you ever had any amount in a pension. So, you just need to have had even £20 in a stakeholder pension years ago to be able to use carry forward.

Now, this means if you haven't used your annual allowance from the three years before the current year, then you can carry that forward. But this is only relevant if you can make them large contributions into your pension and you have the earnings to match that mount of pension contribution that you want to make. Now, again, financial advice is key to help with carry forward, it's quite complicated. If you want to find out, you know, more information about how carry forward works, again, there's a really helpful article about it on the MoneyHelper website.

Sarah Pennells: And it's important to say as well, that how pensions saving are measured against the annual allowance depends on the, kind of, pension scheme that you're in. So, for defined contribution pensions, which we've been talking about, where you and if you're employed, your employer build up a pot of money and based on your own contributions, plus of course, that tax relief. Any employer contributions and any contributions made on your behalf by someone else, all count towards that allowance.

Clare Moffat: For defined benefit pensions, it's not quite as easy as that. So, that's-, so it's mainly public sector pensions now and where you're guaranteed that certain amount in retirement, which is linked to the salary you earned when you're employed. Now, in that situation, your annual allowance is based on the increase in your pension benefits over the tax year. So, that can be quite tricky to work out because it's just-, it's not as easy knowing £20,000 went into your pension fund.

Now, your pension scheme can explain more about this, and they'll tell you how much you've used. Again, if you think that the annual allowance affects you, the best thing to do is to take financial advice and it's really important to say, that an annual allowance tax charge it doesn't necessarily mean that you should stop paying into your pension, you can actually end up better off in retirement, even if you have had an annual allowance tax charge. But an adviser will help you work all of this out.

Sarah Pennells: I realise that we're throwing a lot of terminology around, but I have heard of one, something called tapered annual allowance. So, is that the same as the annual allowance?

Clare Moffat: I think the confusing is that lots of these terms sound quite similar. So, the tapered annual allowance is not quite the same as the annual allowance. Now, this affects even fewer people than it did a few years ago and it reduces that annual allowance from that £40,000 mark, gradually, sort of, tapering down until it could reduce to £4,000. Now, it all depends on how much you earn. There's a two part test, but essentially this is only going to affect you if you have income over £200,000 after your pension contributions have been deducted.

Again, getting advice on this, you know, if it is something that you think might impact you is really important. Okay, so, there's one more allowance though that we should mention. And again, it sounds quite similar. We've saved this one until the end because this allowance, now it's called the money purchase annual allowance is unlike the other allowances we've discussed because it's only going to affect you when you take money out of your pension, not when you pay money in. So, Sarah, can you tell us a little bit more about the money purchase annual allowance?

Sarah Pennells: Yes, absolutely. And we aren’t speaking in detail in this webinar are about what happens if you take money out of your pensions because frankly, we just don't have time today, but it is worth talking about the money purchase annual allowance for the reasons Clare mentioned. It's been in the news recently and there have even been some rumours that it may be disappearing in next week's budget, so it's good to mention it. And it is something that can potentially affect a lot of people.

So, the money purchase annual allowance may affect you if you start to take money flexibly out of your defined contribution pension pot and later, want to contribute to a pension and it does this by dramatically reducing the amount of money that you can pay into your pension every year, without having to pay a tax charge. Now, taking money flexibly includes, taking an income, or maybe taking a series of lump sums from your pension, but it doesn't include taking the tax free cash out of your pension, or using your pension to buy a regular income in the form of an annuity.

So, let's talk about this more and explain it with some figures. We've said that the annual allowance is £40,000, but if you trigger the money purchase annual allowance then the amount that can be paid into your pension drops right down to £4,000. So, for example, you know, you might have stopped work and, you know, retired and started to take a bit out of money out of your pension, on top of that tax free cash lump sum. And then realised that actually, either you miss work or the cost of living crisis, for example, means you have to go back to work. And then when you're back in work, you'd only be able to contribute £4,000 a year into your defined contribution pensions.

Now, £4,000, that's about £333 a month, but as I mentioned earlier, that £4,000 limit includes any contributions you make, any contributions your employer makes, if you're in a workplace scheme and the tax relief. And we are seeing more and more people going back into work as a result of the cost of living crisis when they had retired. So, I think having explained when it does apply, Clare, when doesn't the money purchase annual allowance apply?

Clare Moffat: Well, it doesn't apply if you take money out of a defined benefit pension. So, those public sector pensions we mentioned. So, say I was a nurse, so, if I retired at 55 and took my tax free cash and pension income, but then decided a few years later that I wanted to do a totally different job and I went to work in a shop. The money purchase annual allowance doesn't apply to me and that's because it's not flexible access, it's from a defined benefit pension. And in a similar way, it doesn't apply if you take tax free cash and buying an annuity which isn't flexible.

It also doesn't apply if you only take your tax free cash and then move the rest of your pension money into drawdown, but don't take any income from that drawdown. So, that might be because you're still working. So, we would often see people reach the age of 55 and want to access some of their tax free cash and move the rest into drawdown. So, they will not trigger the money purchase annual allowance. So, just to put some numbers around it. If I have a £100,000 in my pension pot, take £25,000 tax free cash and move the rest into drawdown, but don't touch it, probably because I'm still working, my annual allowance will still stay at £40,000. And it also doesn't apply if you take up to three small pensions of less than £10,000.

Sarah Pennells: And what about a bit more detail about when it does apply?

Clare Moffat: Well, it will apply if you've moved that pension pot into drawdown and start to even take £1 of income. So, probably when you've stopped working, that you need some income to live on. It'll also apply if you take any amount of a cash lump sum. Now, cash lump sums are those payments where 25% is taxed at 0 but the other 75% is taxable, both those payments come into your bank account at the same time. So, you'll get the tax free part and the taxable part.

Now, if I even took £100 of one of these cash lump sums, then I trigger the money purchase annual allowance. Before we hand over questions that have come in during the webinar, there's one question that many people submitted, in fact, it was one of the most asked questions. Eleanor was just one person who asked it. Now, that question is, 'I have multiple pensions from different jobs, should I consolidate them?' And again, Sarah, this is another topic that we did a webinar on.

Sarah Pennells: That's right. So, we did a webinar on pensions transfers or pension consolidation last summer and there's the link to that on this page. I think though, having said that, it is worth spending a bit of time just talking about some of the pros and cons of transferring. Before we do that though, I think it's also worth saying, when you can't transfer a pension. So, you can't transfer a pension if you're in a public sector scheme, such as the NHS, teachers, police or fire fighters and that's because the money that you pay into your pension today, goes out to pay today's pensioners. So, there's no actual fund for you to transfer out of.

The only exception in terms of public sector pensions is the local government pension scheme, which does have a fund. So, in theory, you could transfer it, but it is generally assumed to be bad idea to transfer from one of these public sector final, defined benefit pensions. So, Clare, if you are somebody and many of the people who submitted questions who you said did, who has say, several defined contributions pensions and you're thinking of transferring or consolidating, what are the main pros and cons?

Clare Moffat: Well, there are several things that you need to think about. It's worth emphasising that we're not financial advisers, so we can't advice you on the best course of action. But in terms of pros and cons, there are a few to consider. So, the first thing is charges. Now, it might be worth consolidating your pension to one that has lower charges, but the cheapest isn't always the best. Now, you might be actually paying a little bit extra, for, extra for features that are really important to you. Secondly, fund choice. Now, we talked earlier about where your pension money is invested and the fact that you don't have to keep it in default fund, for example. Now, most pension schemes have a number of different investment funds that you choose from, but some might have a wider range and others might have a focus on certain things. So, for example, responsible investment and again, that could be really important to you.

Now, if you've a few smaller pension pots of under £10,000, so, maximum of three. You might not want to transfer them because you could take them out without triggering the money purchase annual allowance that we, you know, I just spoke about. So, it might be useful, even if you've got, you know, a kind of, a bigger pot to leave a few of these little pots because it wouldn't trigger that allowance. The last reason why you might want to combine your pensions is if one or more of your pensions has quite restricted options in terms of what you can do with your money when you retire. So, you might have to take all of your money in one go for example, or you might not be able to go into what's called drawdown and that could be because it's an older style, type of, pension.

Sarah Pennells: Now, it is important to say of course, that there's no guarantee that by, by combining your pensions, they'll do any better than if you left them where they were. And in some cases, it can be a bad idea to transfer your pensions, especially if they're older ones because they can have a valuable features, such as a guaranteed annuity rate or a guaranteed value. Now, if you do want to find out more about transferring your pensions, I would really recommend that you watch our webinar and if you're thinking of combining your pensions, it's a good idea to talk to a financial adviser.

So, we've covered a lot in the last, well, 40, nearly 45 minutes or so, but we do have some time for some questions, but before we do that there's one last poll because we'd really like to know, what topics, what topic you'd like us to cover in future webinars. So, please vote now in the last poll of our webinar.

Clare Moffat: It's interesting, the numbers are going up and down.

Sarah Pennells: So, at the moment, pension options at retirement is winning by a nose, I'd say.

Clare Moffat: Yes, and we didn't have the time today to talk about what happens at retirement. It's a massive subject as well and again, you know, in the questions before the session today we did have quite a few questions on that as well because it does seem quite a confusing time and people aren't sure about the different options that are available.

Sarah Pennells: Yes. So, okay, well, I think, you know, I think we've got a very clear, a clear answer there. So, that's good to know. Also, the one on financial advisers, how to find a financial adviser and what they do. So, thanks very much for voting because that's really definitely given us some very clear answers about what you want to know about next. So, as I said, we have got time for some questions, and we've had a lot of questions coming in. So, again, thank you so much for submitting questions.

The most popular one which is from Alex, I, I think it's something we've just been talking about which is transferring pensions. So, hopefully Alex, you feel that we've answered your question. Alex says, 'I've got a couple of different pensions from different jobs, plus my current one with Royal London, is it advisable to bring these into one fund.' So, we have just covered it and as I mentioned there is the link to the transfers webinar. So, I hope you don't think that we're ignoring your question but it's a really important topic, but I think the best thing probably, unless there's anything you want to add Clare. The best thing is possibly to listen to our webinar.

Clare Moffat: Yes. I think there was a lot more detail in that webinar, but it is something and because people are changing jobs much more frequently than they did in the past, then people will have more pension pots and, you know, it, it's obvious-, you know, everybody, kind of, thinks, 'Will, will it make it easier administratively if I can everything in the same fund?' But for some of the reasons we mentioned, there are, you know-, sometimes it might be a good idea but there could also be scenarios when not a good idea to do that. But, yeah, much more detail in the webinar on that.

Sarah Pennells: And I think it does depend a bit on the kind of person that you are, in that some people find it quite easy to keep track of a lot of pensions. That might seem like an odd thing to say but especially these days when many pension companies have apps, you know, you can login online. It-, not that you necessarily have to go through pieces of paperwork to find out what's happened to your pension. Other people do find it quite overwhelming. So I think it's about, you know, there, there may be reasons around, you know, charges and things like that, and the levels of risk and, and, and the features you mentioned, but it also does come down a little bit to the kind of person that you are. But, as we've pointed out, there are some pros and cons and it is definitely worth thinking about what you might be giving up as well as, you know, the level of charges you could pay by transferring and so on. So, okay, we've had quite a few more questions. Now, Lily has submitted a question saying, 'I'm a bit concerned that the value of my pension has dropped. What can I do about this?' And we did have one question about this that we covered earlier on in the webinar but, Clare, I think it's just worth spending a bit more time talking about this, because, you know, nobody likes to see the value of their investments, whether it's a pension or, you know, stocks and shares, an ISA, whatever it is-, you don't want to see that value go down.

But I'm not trying to be flippant when I say that, but stocks and shares, investments, I mean, they're, they're not a steady line. They do go up and down. You do get volatility. That does go along with investing in stocks and shares. But is there anything people can or should do, apart from, you know, understand that emotional side, which is it is hard to see the value of your money going down?

Clare Moffat: I think when there’s times of, you know, things are happening that maybe are causing fluctuations in the stock market. If people are looking at an app every day, then that's not giving them a, kind of, consolidated view over, over time. So sometimes that can make people feel a little bit more anxious. It's also very important, and you mentioned this earlier, you know, risk and, and what level of risk you're comfortable with is important, and that's when it can be really good to have a financial adviser who can talk through these things. Also it's worth remembering that pensions are a long-term investment and they do invest-, pension funds invest in a huge amount of different assets so they'll have different-, it, you know, it won't just all be equities, whether it can be a bit more of a, kind of, volatility. There might be commercial property, for example. There might be other, like, government bonds and things like that. So, there is-, you know, they're meant to, kind of-, that, that should deal with some of the risk. But obviously if you're in your twenties, for example, then you've got a long time until you can take out your pension, so perhaps, you know, worrying about what's going to happen then isn't as important as if you're getting closer to retirement. You might be thinking about, 'Well, maybe I should be in some more cautious type of investments.'

But, you know, I, I can't, kind of, say enough that actually having a financial adviser whose job it is to take that kind of worry away from you by helping you work out what level of risk you're comfortable for is, is really worth its weight in gold.

Sarah Pennells: Yeah, really good points, and I think it's also just worth saying that, depending on the age that somebody is, they may want to have a, a, an appointment with Pension Wise. Now, Pension Wise can't give anybody financial advice but it can talk you through the options. It's designed for people who have to find contribution pensions once they're over the age of 50 to think about the different options. But, again, it might just be useful to, kind of, just, just to have a conversation so you can find out. Pension Wise is-, it's a government website and you can book a-, you can have an online appointment or you can book a phone call, so that's maybe something to think about as well. Now, we are getting quite a few questions about what happens to your money when you take it-, what happens to your pension when you take money out of it, which we, sort of, said we weren't going to cover but I don't want to ignore the questions that are getting voted up. So, there's one here from Phil, which is-, Phil Jones, who says, 'What is the impact of withdrawing from my pension at the age of 55 if I plan on carrying on working? Would it affect other pensions or are they considered totally separate?' So, Clare, what's, what's the answer to that?

Clare Moffat: Okay, so let's, kind of, take the first part of this. So if Phil wanted to take, say, his tax-free cash, because he's still working, so he takes his tax-free cash and that money comes into his bank account and he moves the rest into drawdown, so the other 75% goes into drawdown. Now, drawdown is just like a, a, a pension pot. It's invested. It can be invested in similar assets, but that-, if he doesn't take any of, of that money, then he'll not have any additional income tax to pay. He'll not trigger that money purchase annual allowance we spoke about. So, looking at it that way, just taking the tax-free cash, if that's what he needed, then that's probably the-, a better thing to do. If he decided he needed all of a fund, so say he had three different pensions but one of them was worth £50,000, for example, if he wanted to take all of that pension then, then 25% of that £50,000 would be tax-free, but he would pay tax on the other 75%. And, you know, so there's an income tax issue because he'd be paying more tax than he normally would be paying, but he would also trigger that money purchase annual allowance, which would mean he'd be restricted to paying a maximum of £4,000 into his other pensions. I think when Phil's saying would it affect other pensions or are they considered separate, so they, they are separate. They're separate pensions. For each of those pensions, you get 25% tax-free cash and you can do different things with them.

So, you could move, you know-, take tax-free cash from one pension and move the other 75% drawdown but you-, you know, with another pension, you could take 25% tax-free cash and then buy an annuity with the part that's, that's left as well. So, you can do different things with them but from each of those pensions, you are allowed 25% tax-free cash. But if you go over that 25% tax-free cash and you access any of the rest flexibly, or you take one of those cash lump sums, so instead of taking that 25% tax-free cash, you take a cash lump sum and that comes with-, you know, I mentioned the fact that that comes, kind of, together, so you get the tax-free part together with the taxable part. There's an income tax issue but also, even for that £100, if he takes it, then he would trigger that money purchasing allowance.

Sarah Pennells: Great stuff, thank you. Now, we've had another question. We have one from Kerry about is it better to keep pensions separate or transfer them but I think we'll-, I, I think we've done quite a lot on pension transfers, just in this-, in this webinar and I said we did the whole webinar in June, I think it was, last year. So, I hope you find that useful. Jane's asked a question saying, 'If you've had a number of providers over the years, is there an easy way to find out where you hold differing pots of pension funds?' And, and, Clare, I mean, if I mention the two words pension dashboard, I think this is something we've talked about in a couple of webinars, about how this is going to be, kind of, coming down the tracks and this is gonna be-, you'll be able to see all your pensions in one place, including your State Pension. But there was news about that just last week, wasn't there?

Clare Moffat: Yes, so the pension dashboard is being put back a little, just so there can be more testing and, and things like that done. And it will make things much easier, but just now, what Jane could do is get in touch with the providers. If you can find the paperwork, get in touch with the providers. They'll be able to tell you how much is in the different funds. What happens if people move house sometimes, they don't remember to let different-, especially if it's a job, a few jobs ago, then you might not remember to get in touch with the pension scheme. So, sometimes people aren't getting the documentation to the right address. But if you think you, you know, you might have been in a pension and you can't remember much about it, then I think the Pension Tracing Service is a good service to use. Sarah, if you want to say anything more about that?

Sarah Pennells: Yeah, so, as, as you say about the pension dashboard, I think it was due to come in in 2024, I believe, but there has been, as you say, a, sort of, a slight delay on that. The Pension Tracing Service, now, it's really worth saying that this is-, this is a government service and it's called Pension Tracing Service but it doesn't actually trace the pension for you and, kind of, bring it to you. What it does do, though, which is very useful, it will give you the latest and, sort of, up to date contact details for an old pension that you have. So, what you need to do is either have your current name of your employer, an old name of the employer if you don't have that, or if you know the pension scheme name, then pop that information in. And that's a, a government website and we can send out the details of that with the e-mail after the webinar or with the link to this webinar. And what the Pension Tracing Service does is it'll give you the up to date contact details. You then need to contact them. They'll normally ask you for your National Insurance number and some other questions, and then they'll tell you whether indeed you have got a pension with them and then you can find out how much it's worth. Now, when you're looking for the Pension Tracing Service, please make sure that you look at the, the gov.uk website because there are some other companies around that sometimes advertise and, you know, come to the top of a Google search or search engine search and they may charge you.

Whereas the government's Pension Tracing Service is free to use. Now, we've had a lot of questions. As I said, a lot of them actually are about pensions and retirement, so I think that's definitely gonna be something we do a webinar on. But there was another question that I just saw a moment ago and I was thinking, 'This would be a really good-, yeah, it's a question from Dave, who says, 'Is the income from the State Pension taken into account when income tax is calculated from private pensions?'

Clare Moffat: So, yes, yes and no. It sits in your income tax stack, which means that then if you have other pensions, then they will-, so it will use up-, that State Pension will use up some of your personal allowance, so we've got £12,570 of our personal allowance. State Pension will, as we talked about earlier, so it's going to over £10,000, it will use up most of your personal allowance. So, so if you only had State Pension, then you wouldn't pay any tax on it, but if you have private pensions sitting on top of that, then you will use up the last bit of your personal allowance and then you'll pay 20% tax, 40% tax and, and so on. So it's a, kind of, yes and no question. So it might be that you-, say you retired at 60, then your State Pension wouldn't have kicked in. So, you would receive more of your private pension money without paying tax on it, but then when your State Pension does kick in, it essentially comes first. And then pensions are taxed like salary is taxed. It works in exactly the same way. So, you know, it just has, kind of, bands and thresholds, so once you're over the personal allowance, as I said, you're paying 20% tax.

Sarah Pennells: Okay. I'm gonna try and sneak in two questions in the last few minutes, so they're, they're hopefully short-ish answers. So, Simon has asked, 'What is a drawdown?'

Clare Moffat: Okay, so drawdown, if, if you think of a pension pot for the money you save up, so the money that you pay into, your employer might pay into and where the tax relief goes, if you think of that as one pot and it's invested-, as I said, it can be invested in lots of different things. Well, a drawdown pot is just another type of, of pot. It's just-, it's invested in the same way. It could be invested in exactly the same type of assets. The only difference is that one has-, you know, you have to go through a, kind of, pensions tax process to get from one to the other, and you would have an entitlement to tax-free cash. So once you take your tax-free cash and then move the rest into drawdown, you can do that. You don't have to do that all at once, so you could take-, you might have a, a pension pot of £100,000. You might take £10,000 and you could take £2,500 as tax-free cash and move the other £7,500 into drawdown. Then that money is just sitting available for you to take out when you want to take it out. So, you've got to be over 55 and you can't pay money into a drawdown plan. So if you can still make pension contributions, then the money would go into that, kind of, pension pot but the drawdown fund-, kind of, you don't ever need to take any money from that. Some people leave some pensions and pass them on on death.

But when you take-, you can take money out of it, but you can't pay into that separate pot. So if you think of them as, kind of, two different pots but, sort of, invested in the same things.

Sarah Pennells: Okay. Right, now one last question, which hopefully is going to be quite a quick answer. It's a question from Murray who wants to know, 'Tax relief is not provided on employer contributions. Correct?'

Clare Moffat: Well, yes and no. If you are-,

Sarah Pennells: Your favourite answer.

Clare Moffat: I know. If you're a business owner, then an employer contribution, you'll get corporation tax relief on. So if you're a, a director of a business, so there is corporation tax relief on that. And, but I don't know if this question is in relation to, kind of, when we spoke about salary exchange. Because what happens there is that you, your employer is making the full contribution on your behalf and, in exchange, you're getting less salary normally. So, so you're not getting income tax relief on that but you aren't-, well, it's not in the same way as we mentioned. So what happens is your, your employer is going to pay more on your behalf and your salary goes down, so because your salary has gone down, you pay less income tax and less National Insurance. So that might be what he's, kind of, getting at but, yeah, so employer contributions do get tax relief, it's just not income tax relief.

Sarah Pennells: Okay, well, great stuff. We have had so many other questions but we are going to probably carry some of these over into future webinars because, as I said, we've had a lot of questions about pensions and retirement. But thanks again. A huge thank you to everybody who submitted questions in advance and during the webinar, and for voting in our polls, all of which is appreciated. So, we will be sending out a, a link to the recording of the webinar in the next day or so. In the meantime, thanks again very much for joining us and have a very good afternoon.

Clare Moffat: Thank you.