BOE economist ‘can’t make sense of pensions’: Five key points everyone should know
In a speech given yesterday evening Andrew Haldane, the chief economist at the Bank of England, said many people find finance difficult, partly because it is difficult and partly because it is deliberately made so.
He went on to say that he himself finds pensions complex: “I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions.
“Conversations with countless experts and independent financial advisors have confirmed for me only one thing – that they have no clue either. That is a desperately poor basis for sound financial planning.”
Off the back of his comments, YourMoney.com spoke to Kate Smith, head of pensions at Aegon to find out five key points everyone, especially beginners, should know about pensions.
1) Government top up
The government tops up your pension contributions based on your tax rates. Basic rate taxpayers get an additional 20% from the government paid into their pension. So for every £8 you pay in after tax the government adds another £2. Higher rate taxpayers get £4 added for every £6 they pay in.
See YourMoney.com’s Pension tax relief: what you need to know for more information.
2) Annual allowance
For most people, the maximum payable into a pension is £40,000 a year including the government top-up, and any employer contributions. You get tax relief from the government on pension contributions up to this limit. But you can’t pay more into a pension than you earn each year. For higher earners, the new tapered annual allowance means that the amount you can save annually is reduced by £1 for every £2 of income above a certain income threshold.
See YourMoney.com’s Pension annual allowance: what you need to know for further information.
3) Lifetime allowance
The maximum you can build up in a pension over your lifetime without additional tax charges is £1m, down from the previous £1.25m allowance.
See YourMoney.com’s Lifetime allowance and how to protect your pension pot from tax guide.
Saving into your employer’s workplace pension is the simplest way to save for retirement. You benefit from both your employer’s pension contribution and the government top-up to your own contributions. Most people will be automatically enrolled into a workplace pension.
The minimum pension contributions under auto-enrolment are currently 1% from the employer and 1% from the employee including tax relief, based on a band of earnings.
See YourMoney.com’s guide on auto-enrolment and what you can do if you opted out already.
5) Pension freedoms
Under ‘pension freedoms’ introduced in April 2015, from the age of 55 you can take your pension and use it exactly how you like, including buying a retirement income or taking out cash sums. You can take a quarter of your pension pot as a tax-free lump sum. The remainder is taxed under income tax rules.
See YourMoney.com’s story on Pension freedoms one year on to find out how retirees have made the most of the new flexible rules.