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For many people, pensions can feel complicated, confusing or even distant. Yet they are a vital part of your financial planning and your future retirement. Episode 2 of the Retire Well with Wealth of Advice podcast explains what a pension is in the UK, why it matters, the different types available, and how to make sure yours is working for you.
Many people want to understand pensions better but do not know where to start. Research shows that 43% of people do not know how much is in their pension, highlighting how easy it is for pensions to become overlooked.
Pensions are not just for the distant future. They are a key part of planning for retirement, helping you maintain your lifestyle, manage tax efficiently and provide financial security. Understanding pensions in the UK is an essential step in achieving long-term financial goals.
Joe and Matthew, Chartered Financial Planners, explain the main types of pensions available in the UK:
• State Pension. Funded by National Insurance contributions, the State Pension provides a basic income in retirement. Check that you meet the qualifying years for full entitlement.
• Defined Benefit (DB) Pensions. Often provided by employers, these pensions promise a set income based on your salary and years of service. They offer certainty but can be complex to understand.
• Defined Contribution (DC) Pensions. These are based on contributions and investment returns. The value at retirement depends on how much has been saved and the performance of investments. DC pensions give flexibility but require more active management.
Pensions exist to provide financial security in retirement and come with tax advantages to encourage long-term saving.
Pensions provide tax relief on contributions and allow income to be taken in a tax-efficient way during retirement.
• Annual Allowance. The standard annual allowance for pension contributions is £60,000 (tax year 2025/26). Contributions above this may be subject to tax.
• Carry forward. If you have not used your full annual allowance in the previous three tax years, you may be able to carry it forward, allowing larger contributions in the current year.
Understanding these allowances ensures you maximise tax relief, contribute efficiently to your pension and avoid unnecessary tax charges.
When you access your pension, it is important to understand how it is taxed:
• 25% Tax-Free Lump Sum. Most pensions allow you to take up to 25% of your pension pot tax free.
• Income Withdrawals. Any additional withdrawals are treated as taxable income at your marginal rate. This applies whether you take money from a defined contribution pension or a flexible drawdown arrangement.
• Impact on Other Benefits. Pension income may affect entitlement to means-tested benefits, so careful planning is important.
Understanding the taxation rules ensures you take withdrawals in a way that minimises tax and supports your long-term retirement plan.
We will dig into the different ways that you can take your retirement income in a future episode.
Many people have multiple pensions, some of which may have been forgotten. In the UK, £26 billion sits in unclaimed or lost pension pots. Workplace pensions can also underperform if you are not in the right fund. Regular reviews are essential to ensure your savings are growing as efficiently as possible.
Other important considerations include:
• Pension Top-Ups. Planning contributions ahead and using tax relief can significantly boost retirement savings.
• Annuities vs Drawdown. At retirement, you will need to decide how to access your pension income. Annuities provide a guaranteed income, while drawdown offers flexibility but with investment risk.
• Part of a Larger Plan. Pensions should not be viewed in isolation. They are one piece of your broader retirement plan, alongside savings, investments, and other assets.
It is never too early or too late to check your pension in the UK. Make sure you know where your pensions are, what type they are, and whether you are in the right fund.
• Use the BR19 form to check your State Pension forecast or top-up contributions.
• Trace lost pensions using the government’s pension tracing service to ensure no money is left unclaimed.
If you need guidance, Wealth of Advice can help. Our Chartered Financial Planners can review your pensions, assess investment options and help you plan for a retirement that meets your goals.
Take control of your pensions today and make sure your retirement is secure and well-planned.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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