A Pension is for Life, Not Just for Retirement

Chartered Financial Planner Alex Pickles considers the benefits of contributing to a pension in retirement.

Pensions are an essential piece of your personal finance jigsaw and they no longer need to be seen simply as vehicles to provide an income in retirement. Whilst this is clearly one of their main functions, using a pension as a savings plan can help fulfil all sorts of financial goals and objectives that you may not have even considered…

For example, did you know that you can still pay into a pension in retirement? But why would you - what are the benefits?

  • - When you save into a personal pension, HMRC will automatically apply Basic Rate
  •   tax relief of 20%, topping up your contribution.
  • - If you are a Higher Rate taxpayer (40%) or Additional Rate (45%), you can claim even
  •   more relief.
  • - There is no tax to pay on any investment growth within the pension.
  • - Up to 25% of the fund can be withdrawn from age 55 as a tax-free lump sum.
  • - Any other withdrawals are taxable at your marginal rate of Income Tax.
  • - If you don’t use all of your pension monies in retirement, the remaining funds can be
  •   passed on in a highly tax-efficient manner to whoever you choose (e.g.
  •   children/grandchildren).

This all sounds very useful, but how much can you actually contribute once retired?

Well, everyone under the age 75 can contribute £3,600 gross per tax year into a pension and receive 20% tax relief, regardless of how much they earn. To make this contribution, you would only need to contribute £2,880 and HMRC will automatically add £720 of tax relief to bring the total to £3,600. Of course, if you have relevant earnings above this then you can contribute up to that amount with tax relief (subject to certain limits and rules).

To put this in perspective, if you retired at 55 and saved £2,880 per year into a pension, you would have accumulated £72,000 by the time you reached 75 (without any investment growth at all). That would include £14,400 in Basic Rate tax relief from the government (even more if you had been a Higher or Additional Rate taxpayer) - a significant amount to leave to your beneficiaries!

Of course, you may have intentions to spend the money later in life rather than leave it to your beneficiaries (and why not!). Let’s look at how that might work:

Jane is 55 years old and recently retired. Her only income is a Private Pension of £8,000 p.a. and she is therefore a non-taxpayer at this time. She has savings in the bank and decides to invest £2,880 of this into a personal pension, which, as we now know, will be topped up to £3,600 by HMRC.

Five years later, Jane is now 60, and let’s assume that her new pension has now grown to £4,500. With plans for a big family holiday, she decides that she would now like to withdraw the fund to help pay for this. She can withdraw 25% (£1,125) as a tax-free lump sum, with the remaining £3,375 being added to her income for the year and taxed at her marginal rate. We will assume that Jane’s Private Pension has now increased to £9,000 p.a.; when we add the two incomes together, she has a total of £12,375. However, Jane has a Personal Allowance (the amount you can earn before any Income Tax is due) of £12,500, meaning that any income that falls within this is also tax-free. Therefore, in this scenario, Jane has been able to withdraw the whole amount from her pension without any tax falling due.

By saving her money into a personal pension rather than leaving it in the bank, Jane ended up around £1,620 better off (depending on the interest rates currently offered by her bank accounts, which are generally low at present) – she received immediate tax relief of £720 on her contribution and over five years her investment grew. As well as not paying any tax on the investment growth, she didn’t pay any Income Tax when withdrawing the money.

This is just one example of how you can utilise pension contributions in retirement as part of your overall tax planning; however, as you can see, there are many variables involved and therefore you should always seek independent financial advice if considering this type of action.

Alex Pickles APFS
Chartered Financial Planner

Read more of our articles about pensions here

Information is based on our current understanding of taxation, legislation, and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

A pension is a long-term investment - the fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The scenario included is for information purposes / general guidance only and should not be interpreted as advised recommendations.