Pensions: "To me; retirement means doing what you have fun doing." Dick Van Dyke.

A pension may not be anyone's idea of fun but it is important to save for your retirement so you can enjoy it. Whether you are a member of FIRE (Financial Independence Retire Early) and stopped work in your early thirties or you have finally given up your job in your late sixties it is likely that you will have some form of pension to help you.

Pension types.

There are three main types of pensions, you may have just one or could have all three. The state pension is available to anyone who has paid a minimum of 10 years of National Insurance contributions and pays £140 a week (a full state pension with 35 years of NI contributions is £185 a week) although there is a fear that this will eventually be phased out.

Workplace pensions are arranged by your employer and unless you opt-out you and your employer both contribute a percentage of your wage. I currently have a NEST workplace pension with my employer which is backed by the government.

A private pension is set up by you as the individual and includes SIPPs (Self Invested Personal Pensions) or if you are a company director an SSAS (Small Self-Administered Schemes). I currently have a SIPP through Hargreaves Lansdown and may well look into an SSAS in the future.

My pension journey.

I have had various pensions since my first full-time job in 2007 including six years of paying into a local government pension scheme. For a couple of years, I did take time off from paying into a pension (my mistake) but they are a great tax-efficient way of saving for retirement.

When I started my current employment I took up the offer of the NEST pension which was calculated using relief at source. Whoever looks after the pension scheme claims back basic rate tax relief from HMRC and that gets added to the pension pot. So if you wanted to contribute £100 you only pay £80 and the other £20 is reclaimed from HMRC which is carried out automatically.

If you are a higher rate taxpayer however then you can claim an additional 20% tax back on any income you have paid 40% or up to 45% tax on.
Example: You earn £65,000 in the 22/23 tax year and therefore pay 40% tax on £15,000. If you pay £20,000 into the pension overall you will automatically
get tax relief at source for the full £20,000. However, you can claim an additional 20% tax relief on the £15,000 you paid a higher rate of tax on. There is no
additional relief for the extra £5,000 put into the pension.

I asked my accountant to sort this on my personal tax return which for the amount it cost saved me the aggravation of trying to do it myself. Payments were matched up to a certain level and I recommend you match to the maximum amount where possible as this is essentially free money. As of 2022, you can put £40,000 away into your pension which if you are a brilliant saver can be handy if you have already maxed out your stocks and shares ISA limit of £20,000 a year.

Pension pots.

As stated previously I had a few different pensions. It is always worth getting advice if you are thinking about moving a pension as if you want it is possible for them to be transferred. I had two previous pensions with Scottish Widows and Aegon that I transferred into my NEST pension as I wanted easier control over them in one place. It allowed me to set a different risk value in the hope that my pension pot would grow over time; again worth getting advice as your pension fund can go up as well as down.

This year I also opened up a SIPP with Hargreaves Lansdown as I wanted to transfer my LGPS into my SIPP to give me control over how it is managed. If the pot value is over £30k then you need to seek the advice of a financial planner. It is taking a while but hopefully, as of this August 2022, the transfer should be complete. I may then see if my employer can pay into my SIPP allowing me to transfer my NEST pension over giving me full control of where my pension is invested (more on investing here with my ISA). The HL pension will also have lower fees than NEST so it can be worth shopping around.

What can I invest in?

As above my Stocks and Shares ISA post gives guidance on how I plan to invest my pension pot but an option that some pensions offer (my HL doesn't) is the opportunity to invest in property. This could be a physical commercial property such as an office or warehouse (further guidance from Tax Insider here) or through a REIT (Real Estate Investment Trust). The route of owning a physical property won't be for the faint-hearted but if you run a business it can be a tax-efficient way of owning your own premises and especially good if you have the property held in an SSAS.

A REIT must satisfy certain criteria but they are generally companies that hold a portfolio of properties which can also include residential property. They tend to be on the major stock exchanges so you can buy shares in them and receive dividends like other stocks and shares. The main benefit for the owner of a REIT as a company is that income generated is tax exempt however they are required to distribute 90% of the rental income received to their shareholders which is how they can benefit anyone like you or me. They can therefore provide a good option as part of a diverse portfolio.

What's next?

I hope to add to my pension over time but as I cannot start taking money from my SIPP until I hit 55 (state pension currently 68!) so I aim to make sure that I maximise the amount my current employer will match and then use my Stocks & Shares ISA for my main saving and investing goals.