Planning for your retirement

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Planning for your retirement
Retirement planning

Retirement Planning

Planning for retirement, all comes down to ensuring you have enough savings and income to retire. The age at which you will hopefully achieve this milestone should be considered alongside how long you desire to keep working for


Special rules allow individuals who set up a pension scheme to benefit from significant tax reliefs when saving for their retirement. The following is a summary of the main elements of the rules governing private pension contributions. You may also want to consider other saving vehicles such as property, stocks and shares, and ISAs.

Pension contribution limits

There is no overall limit to employer or employee contributions and no upper limit to the total amount of pension savings that can be built up. However, there are limits that affect tax issues and these are set out below.

Tax relief on pension contributions

The government is keen to encourage individuals to save for their retirement, and tax relief for contributions to pension schemes is given at the individual’s marginal rate of Income Tax, subject to annual and lifetime allowances. The income and gains that arise as part of a pension scheme are generally exempt from Income Tax and CGT.

Annual allowance

The annual allowance for tax relief on pensions is currently £60,000 (it was £40,000 up to 2022-23). There is a three-year carry-forward rule that allows taxpayers to carry forward unused annual allowances from the last three tax years (2021-22, 2022-23, and 2023-24) if they made insufficient pension savings in those years.

The annual allowance is tapered for taxpayers whose income exceeds £260,000 (It was £240,000 up to 2022-23). The allowance will reduce by £1 for every £2 that an individual’s income exceeds £260,000, down to a minimum of £10,000 (Up to 2022-23: £4,000).

Lifetime allowance charge

The lifetime allowance was the maximum pension and/or lump sum that benefited from tax relief. In the Spring Budget 2023, the Chancellor unexpectedly announced that the lifetime allowance (£1,073,100 up to 2022-23) was removed from 6 April 2023 and has now been fully abolished.

Options at retirement

People aged 55 and over can take advantage of accessing pension savings. The rules allow people to access their pension pots and decide how to use their defined contributions pension savings. Of course, with the important caveat that proper provision is kept for later years.

There are three main options available: lifetime annuity, flexi-access drawdown, and lump sum payment. These options can be used on their own or in combination. The first 25% is tax-free, and the remainder is taxed at the individual’s marginal rate.

Most individuals can claim the maximum amount as a pension commencement lump sum (PCLS) based on 25% of the available lifetime allowance. Although the lifetime allowance has been removed, a PCLS upper monetary cap remains £268,275 (based on 25% of the 2022-23 lifetime allowance). Any individuals who already have a protected right to take a higher PCLS will continue to be able to do so.

If the pension saver dies after age 75, the beneficiary will pay tax at their marginal rate if the funds are taken as a lump sum payment.

Working past retirement age

Many taxpayers have reached the State Pension age and continue to work. In most cases, they no longer need to pay any National Insurance Contributions (NICs).

The requirement to pay Class 1 and Class 2 NICs ceases at State Pension age. However, you will remain liable to pay any NICs due to be paid on earnings before you reach the State Pension age. If you continue working, you usually must provide your employer with proof of your age to ensure you stop paying National Insurance. If you would rather not provide proof of age to your employer, you can request a letter (known as an age exception certificate) from HMRC confirming you have reached State Pension age and are no longer required to pay NICs. Your employer remains liable to pay secondary Class 1 employer NICs.

Some jobs have a compulsory retirement age, after which you can no longer work. An employer must have a good reason for setting a compulsory retirement age, such as if there is an age limit set by law or if the job requires certain physical abilities. However, apart from these special circumstances, there is no official retirement age, and you usually have the right to work for as long as you want to. There is also no requirement to provide your date of birth when applying for a new job.

If you are self-employed, you will need to pay Class 4 NICs for the remainder of the year in which you reach State Pension age but will be exempt from the following year.

Pensions Advice Allowance

The Pensions Advice Allowance (PAA) is a government initiative that came into force in April 2017. The allowance allows those nearing retirement to take up to £500 tax-free from their pension pots to pay for financial advice.

The advice can relate directly to pensions and other financial products that help build retirement income, such as multiple pension pots and other assets like ISA savings.

The allowance is limited to £500 per use, and the £500 will not be taxed on withdrawal from the pension pot, regardless of the individual’s income. The allowance must be paid directly from the pension scheme to the adviser and will only be available for regulated financial advice.

There is also an annual £500 tax-free allowance for any adult who receives advice for employer-arranged pensions. The advice provided can relate directly to the pension as well as to general financial and tax issues relating to pensions. The exemption applies to the first £500 worth of pension advice provided to an employee in a tax year, whether or not the employer pays for or reimburses the employee for the cost of the advice.

New State Pension

The New State Pension is a regular payment from the government that can be claimed by people who reach the State Pension age. Claimants must usually have at least 10 years of National Insurance contributions to claim the pension.

The New State Pension is available to:

  • Men born on or after 6 April 1951
  • Women born on or after 6 April 1953

The full New State Pension is currently £221.20 per week. Retirees who reached the State Pension age before 6 April 2016 continue to receive the Old State Pension, not the New State Pension.

The Old State Pension consists of two parts: the basic State Pension and the additional State Pension. Most people need 30 qualifying years of NICs to get the full basic state pension.

Page updated on 13/05/2024

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