Regular instalments

The pension payment can be taken automatically each month by Direct Debit. Once you start making regular contributions in this way, and become accustomed to the regular payments going out of your account, you may find it easier to plan your monthly budget.

One-off investments

Some people prefer the flexibility of making one-off investments at a time of their choosing, rather than commit to regular monthly contributions. Providers usually place minimum contribution amounts on single premium payments. This method can be useful for self-employed people or those paying higher rate tax, as the amount of contribution will attract tax relief at the individual’s highest rate. It is your responsibility to make sure that an investment is made.

A combination the above

This provides both the discipline of regular investments and enables one-off investments to also be made so that the best use of the available tax relief can be made.

Tax relief

Tax relief is granted on pension contributions. Currently, the basic rate of tax is 20% and higher rate is 40%. The additional rate can take this to 45%.

For employees contributing to a personal pension or stakeholder plan, the contribution is made net of basic rate tax. If you invest £80 into a personal pension, the provider will add the remaining £20 and invest £100 on your behalf (claiming the tax relief back themselves from HMRC).

If the investor pays tax at higher rates, it is possible to claim back the marginal rate via a tax return. In the example above, £100 is declared on the self-assessment tax return. The tax office will then credit you with £40 of tax, less the £20 already received and invested.

Self-employed investors face a complex system for claiming back pension tax relief, based partly on what they’ve already paid, and partly on an assumption about future payments. Care should be taken to understand the effect on self-employed tax assessments when a large single contribution is made or regular premiums are stopped.

The tax treatment is dependent on individual circumstances and may be subject to change in future.

Restrictions on payments

The amount you save each year toward a pension, from which you benefit from tax relief, is subject to an ‘annual allowance’. The annual allowance for the tax year 2017/18 is £40,000. You may be able to carry forward unused contributions from the previous three years (ie. back to 2014/2015 for 2017/18).

You can invest up to £3,600 per year gross in a personal pension (and still receive the 20% tax credit) even if you have no earnings. As the person making the contributions does not have to be the same as the person benefiting from the pension, this facility can be helpful in providing a pension for a non-working spouse – or for children and grandchildren as part of inheritance tax planning.

Growth assumptions

When projecting pension fund values, certain growth assumptions are made by pension providers. These are currently 0.5%, 2.4% and 5.5%.

A better way to predict growth is to try to link inflation in and establish ‘real growth’. In other words, if a fund achieves 5.5% per annum growth but inflation has been 2.5% per annum, the real growth is 3.0%. This more realistic real growth assumption is now the norm.

Pension options

From 6 April 2015 new “Pensions Freedom” legislation came into effect, and consequently, at retirement, there are now many new options as to how you take your pension. For further details please refer to our “Your Retirement Options and Pensions Freedom” article.

The actual amount you should invest will be different for each individual. Once you have arrived at a figure, it is useful to try to link it to salary. If you have decided that you can afford £100 per month and you earn £20,000, a quick calculation will show this amounts to around 6% of salary. Try to maintain that link in future years.

You may choose to calculate the level of savings necessary to achieve a certain level of income (in today’s terms) at your chosen retirement date. This target funding is then reviewed on a regular basis to account for revised objectives, investment performance and changing market conditions.

• Is the level of savings you are proposing realistic from a retirement and state pension perspective?
• Do you want the discipline of a monthly investment or could you make lump sum payments from time to time (or both)?
• How much would you need to live on, if you retired today? It’s then possible to begin calculating the cost of achieving that objective.