What is the difference between a defined contribution and defined benefit (or final salary) pension?

A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation. On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you or your employer has contributed and how well your pension investments have performed.

How much can you pay into a pension?

Usually you can pay as much as you earn each tax year into your pension, up to a maximum of £40,000. This is your annual allowance.The allowance reduces for people with an adjusted annual income of £240,000 or more, down to a minimum of £4,000. This is known as the tapered annual allowance.

What is the tapered annual allowance?

The usual £40,000 annual pension allowance is cut for people with an adjusted annual income of £240,000 or more. The allowance reduces by £1 for every £2 of income above £240,000, down to a minimum of £4,000. This is known as the tapered annual allowance.

What is pension carry forward?

Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ unused allowance from the previous three tax years (as long as you have sufficient earnings). You still will receive tax relief on the payments and it can be useful for those affected by the tapered allowance.

What is the lifetime allowance and how much is the tax charge for breaching it?

The lifetime allowance is the amount you can hold in your pension over your lifetime. The allowance is currently at £1.0731 million. Your pension is assessed against the allowance when you take benefits, die or reach age 75. Any excess is taxed at 25% on top of Income Tax if taken as income, or 55% if taken as a lump sum.

What are the tax benefits of pensions?

Investments in pensions grow free from Income Tax and Capital Gains Tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The taxman will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate taxpayers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.

What are your options for taking an income from your pensions?

You can normally take up to 25% of your pension tax-free – either as a single lump sum or as a series of smaller withdrawals. You can also take a regular income from your pension by making lump sum withdrawals, buying an annuity or setting up income drawdown.

What happens to a pension when you die?

A defined benefit (final salary) pension will usually stop paying an income when you or, if your pension income passes onto a dependant, your dependant dies. A defined contribution pension can be passed on to your beneficiaries. If you die before the age of 75 the pension will be passed on tax-free. If you die after 75, your beneficiaries will pay their usual rate of Income Tax on any money taken from the pension.

Retirement Financial Planning | Individuals

In today’s world, preparing for retirement has never been more crucial. With increased life expectancy and dwindling employer pensions, the challenges are substantial. As life expectancy continues to rise, the opportunity for a longer, more fulfilling retirement beckons. However, it also necessitates early and meticulous retirement financial planning. Starting as soon as possible can pave the way for a retirement that is both comfortable and secure, and the expert planners at Francis Clark Financial Planning are here to assist you in achieving just that.

In this guide, we’ll explore the importance of retirement planning advice and how Francis Clark Financial Planning can help you. Our dedicated team of experts will offer guidance and craft a retirement investment plan that is tailored to your needs, securing the future for both you and your family.

The importance of financial planning for retirement

The UK government mandates employer pension funds, providing a foundation for your retirement savings. Yet, it may not suffice to maintain your desired lifestyle post-retirement. Collaborating with our financial planners can help you define your retirement goals and build a tailored plan.

For self-employed individuals, seeking retirement planning advice is particularly vital, as traditional workplace pensions are unavailable. At Francis Clark Financial Planning, our financial planners specialise in helping you identify the right pension solution for your unique circumstances.

Working with our experts will empower you to assess your state pension forecast and existing pensions, enabling a strategic approach to achieving your retirement objectives.

The benefits of pensions

Incorporating pension savings into your retirement investment plan offers a multitude of advantages:

Tax Efficiency: Benefit from tax relief on personal contributions at your marginal income tax rate.
Tax-Free Growth: Enjoy investment growth free of income and capital gains tax.
Diverse Investments: Access a wide range of investment options to suit your unique circumstances.
Flexibility: Access your pension fund from age 55, with the first 25% being tax-free.
Income Options: Choose to purchase a guaranteed income or drawdown income from your invested fund.
Inheritance Tax Benefits: Assets held within the pension fund are usually exempt from inheritance tax.
Legacy Planning: Efficiently pass pension fund assets to your beneficiaries upon your passing.

When to start retirement financial planning

Timely action for a secure future

Your pension funds, alongside your state pension and other investments, will be the bedrock of your retirement income. Ideally, starting your pension savings early in your career is the optimal way to kickstart your retirement investment plan. However, it’s never too late to begin planning for retirement.

Holistic financial forecasting

Our financial planners will help you determine the optimal path to save for retirement based on your unique situation. Lifetime financial forecasting considers your assets, income, expenditure, and liabilities to ensure a comfortable retirement, including provisions for later-life care.

The early bird gets the worm

Commencing your retirement planning as early as possible maximises your chances of realising your retirement dreams. Explore the potential of private pensions and investment planning with our retirement planning advice. Our team of professionals will find what’s best for you.

Accessing your pension scheme

Can I access my pension funds early?

The state retirement age has seen a recent increase, now standing at 67 years old. However, many of us aspire to retire earlier than that. Recent changes in pension regulations have significantly altered the retirement landscape, granting individuals more options than ever before in tailoring their retirement investment plan to align with their unique needs and circumstances.

Under these new guidelines, individuals with defined contribution pensions, encompassing private and some workplace pensions, can start accessing their funds at the age of 55, with this age limit set to rise to 57 by 2028. This flexibility allows you to tap into your entire pension savings and manage them as you see fit. Nonetheless, it is advisable to engage in careful retirement planning to avoid excessive taxation. Our experts can advise you on such matters.

The ability to access pensions at 55 has become a substantial incentive for those aiming to retire early, emphasising the importance of forward-thinking pension planning. In today’s financial landscape, seeking professional advice from qualified experts has never been more crucial. We can assist you in comprehending the optimal strategies for maximising your retirement savings.

Retirement planning advice for a secure future

In today’s complex financial landscape, professional guidance is paramount. At Francis Clark Financial Planning, our specialised pension experts provide tailored advice on various aspects:

Setting Future Goals: Align your financial aspirations with your retirement objectives.
Financial Independence: Strategically plan for a secure financial future.
Pension Freedom: Make informed choices regarding your pension pot.
Income Options: Explore annuities and drawdown to determine the best fit for you.
Tax Relief: Understand contribution limits and tax relief eligibility.
Annual Allowance: Learn about contribution limits based on your income.
Lifetime Allowance: Know the maximum lifetime savings limit to avoid tax penalties.
State Pension: Navigate the new rules and forecast your state pension.
Workplace Pensions: Evaluate your employer’s scheme for retirement income.
Defined Benefit Schemes: Secure a lifetime income stream.
Personal Pensions: Explore tax-efficient saving options, including SIPPs.
Beneficiary Planning: Ensure efficient pension fund distribution to beneficiaries.

Contact us for your retirement financial planning needs

If you’re ready to begin retirement planning, our expert team is just a phone call or email away. Contact us on weekdays between 9 am and 5 pm at 0800 832 1785 or via email at [email protected] anytime. Secure your retirement future with Francis Clark Financial Planning today!

Retirement Planning FAQs

What is the difference between a defined contribution and defined benefit (or final salary) pension?
A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation.

On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you or your employer has contributed and how well your pension investments have performed.
How much can you pay into a pension?
Usually you can pay as much as you earn each tax year into your pension, up to a maximum of £40,000. This is your annual allowance.

The allowance reduces for people with an adjusted annual income of £240,000 or more, down to a minimum of £4,000. This is known as the tapered annual allowance.
What is the tapered annual allowance?
The usual £40,000 annual pension allowance is cut for people with an adjusted annual income of £240,000 or more. The allowance reduces by £1 for every £2 of income above £240,000, down to a minimum of £4,000. This is known as the tapered annual allowance.
What is pension carry forward?
Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ unused allowance from the previous three tax years (as long as you have sufficient earnings). You still will receive tax relief on the payments and it can be useful for those affected by the tapered allowance.
What is the lifetime allowance and how much is the tax charge for breaching it?
The lifetime allowance is the amount you can hold in your pension over your lifetime. The allowance is currently at £1.0731 million. Your pension is assessed against the allowance when you take benefits, die or reach age 75. Any excess is taxed at 25% on top of Income Tax if taken as income, or 55% if taken as a lump sum.
What are the tax benefits of pensions?
Investments in pensions grow free from Income Tax and Capital Gains Tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The taxman will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate taxpayers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.
What are your options for taking an income from your pensions?
You can normally take up to 25% of your pension tax-free – either as a single lump sum or as a series of smaller withdrawals. You can also take a regular income from your pension by making lump sum withdrawals, buying an annuity or setting up income drawdown.
What happens to a pension when you die?
A defined benefit (final salary) pension will usually stop paying an income when you or, if your pension income passes onto a dependant, your dependant dies. A defined contribution pension can be passed on to your beneficiaries. If you die before the age of 75 the pension will be passed on tax-free. If you die after 75, your beneficiaries will pay their usual rate of Income Tax on any money taken from the pension.

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Retirement Planning

The importance of financial planning for retirement

The benefits of pensions