If you are you new to pensions and looking to understand the basics, or you have a pension already and want to know how to get the best from it – then look no further!
As part of Pensions Awareness Week (15 - 22 September) we share the answers to the questions we get asked most on this topic by our clients.
From understanding what a pension is and the different types available, to knowing more about the tax reliefs and benefits, and crucially, deciding if pensions are even worth it.
Here are the key things you need to know to get the most of your out of your pension and save enough for a secure financial future.
What is a Pension?
A pension is a tax-efficient way of saving money for your retirement.
You might have a workplace pension set up through your employer, but you may also have a personal or private pension that you’ve set up for yourself. It’s possible to save into several different pensions within the same tax year, as long as you stay within your annual limits.
There are broadly two main types of pension schemes:
Final salary (Defined Benefit Scheme): A final salary pension scheme (or defined benefit schemes) is linked to your salary and the number of years worked.
Money purchase (Defined Contribution Scheme): A money purchase scheme (or defined contribution scheme) is based on the amounts paid into the scheme – by either the employee, or employer, or both – and the way that this money has performed when invested. The income you get from a money purchase scheme depends on when you choose to access your cash, what charges apply and how successfully the money was invested.
Key points to remember:
- To get pension tax relief, your personal pensions contributions can’t be higher than your earnings or £3,600, whichever is greater.
- Your pension contributions are limited by the pension annual allowance (AA) which is £60,000 per annum.
To encourage you to save into your pension, the government also adds money to your pot through pension tax relief.
When you reach the age of 55 (rising to 57 from 2028) you can take the money from your pension as an income, lump-sum, or a combination of both.
What is a State Pension?
The state pension is a regular payment from the government to help with the cost of living in later life. The payments begin when you reach the government’s state pension age (currently 66 years for both men and women, this will gradually increase to 67 from 6 May 2026).
It’s not always easy to know whether your pension(s) will be enough to provide you with the retirement you want. You also need to factor in how much the State Pension will provide you with.
For the 2024-2025 tax year, the full rate State Pension is £230.25 a week (£11,973 per year), but only those who meet two criteria are eligible for the full sum:
- You must have reached retirement age on or after 6 April 2016.
- You must have made 35 “qualifying years” of National Insurance contributions.
You need a minimum of 10 qualifying years to receive the State Pension at all. The proportion of the State Pension you receive is calculated on the number of qualifying years you have between 10 and 35 years.
Do I get tax relief on my pension contributions?
If you’re under 75 you will get tax relief on pension contributions, subject to the limits set out below. Basic rate tax relief of 20% is automatically applied. Higher rate taxpayers can claim a further 20% and additional rate taxpayers a further 25% (remember - this is not automatic and must be claimed).
You need a minimum of 10 qualifying years to receive the State Pension at all. The proportion of the State Pension you receive is calculated on the number of qualifying years you have between 10 and 35 years.
Example
A pension contribution of £100 gross will cost a basic rate taxpayer £80 net, a higher rate taxpayer £60 net and an additional rate taxpayer £55 net. This ignores potential relief for national insurance contributions if your employer is using a ‘salary sacrifice’ or ‘salary exchange’ arrangement.
Are pensions taxable?
"Typically, up to 25% of the pension can be withdrawn as a tax free lump sum subject to the upper limit of £268,275. Anything else drawn from the plan subject to income tax at your marginal rate."
"Whilst the pension fund is invested, the funds can enjoy tax free growth."
Are pensions protected?
Many people want to know if their pension would be safe if their employer were to go bust.
This depends on what kind of pension you have, but there are safety nets should the business go into administration.
Most workplace pensions and self-invested personal pensions (SIPPs) are covered by either the Financial Services Compensation Scheme (FSCS) or the Pension Protection Fund (PPF), but there are caps placed on the levels of compensation that are available, so you might not get 100% of your money back.
Is my pension subject to inheritance tax?
Pension pots are not currently subject to inheritance tax when you die but this is due to change from 6 April 2026.
Currently, on death before age 75, the pension will be paid to your beneficiaries’ tax free. After age 75, the beneficiaries can withdraw from the pension subject to income tax at their own marginal rate.
Why are pensions important?
Millions of people aren’t saving nearly enough to give them the standard of living they hope for when they retire. Even if you’re eligible for the full State Pension, this is below what most people say they hope to retire on.
If you fall into this category, you have three choices, you can:
- Retire later
- Start saving more
- Lower your expectations of what you’ll be able to afford in retirement.
Are pensions worth it?
In short – yes!
One of the main benefits, when you pay into a workplace pension or personal pension scheme, you can get money back in the form of tax relief. It’s a way of encouraging you to prepare for your retirement and it effectively amounts to free money, so make the most of it!
And finally, a question for you…
Have you nominated a beneficiary for your pension?
In the event that you die before you retire, the trustees of your pension (those responsible for making sure that a pension scheme is run properly) will award your savings to whoever they decide is the most suitable. However, their choice may not necessarily match yours.
If you have a pension, make sure you have nominated who you would like to receive your pension in such an instance. You can choose family members or close friends (and it can be one or more than one person), but keep details of your beneficiaries up to date, so that the trustees have a good idea of where you would like your money to go.
MHA can help
To discuss any of the issues raised in this article, please contact the author Charlotte Elgar who will be happy to assist. Should you need assistance with your financial planning, please contact our wealth management team.
This insight is part of our Pensions Awareness Hub
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MHA Wealth is the trading name of MHA Wealth Ltd, a company registered in England (1916615) with registered office at The Pinnacle, 150 Midsummer Boulevard, Milton Keynes, MK9 1LZ. MHA Wealth is authorised and regulated by the Financial Conduct Authority (FCA) with registered number 143715 and is a member of the London Stock Exchange. MHA Wealth is a member of the MHA group. Further information on the MHA group can be found at here.
This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action.
Past performance is no guarantee of future returns. The price of units and the income from them can fall as well as rise.
This investment is intended as a long-term investment and under current HM Revenue & Customs’ practice it’s not normally possible to access the fund(s) prior to the age of 55. The minimum age will increase to 57 from 2028 with further increases expected as the State Pension Age goes up.
Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended is still designed to meet
Key Risks: Capital at risk. Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested.
Investment markets and conditions can change rapidly. Investments should always be considered long term.
This Information represents our understanding of current law and HM Revenue & Customs practice as at 01/09/2025. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.
