In this video Rachel Jones, Chartered Financial Planner, Talks about using pensions when saving for your long term future.

Rachel:

Hello, I'm Rachel Jones, a Chartered Financial Planner here at BpH Wealth Management and today I want to talk to you about pensions. Today I'm only going to talk to you about defined contribution pensions otherwise known as 'money purchase pensions'. These are by far the most common form of pensions nowadays. They are distinctly different from what is known as 'defined benefit' or 'final salary pensions'; those operate in a totally different way, they have some very valuable benefits but today we wont be concentrating on those.

Pensions are an excellent way to save for your long term future, in particular your retirement. They've had a lot of bad press saying they're very complicated and that's caused a problem for people and put people off but hopefully where you see the more simple aspects of pensions and the benefits that can come from them you'll see that this is a good vehicle.

Pensions aren't the only way of saving for retirement, but they are certainly a great way of putting money away for the long term. The main reason why pensions are so useful for saving for the long term future is because every contribution you will make attracts tax relief, and that's a process where the government adds a certain amount on top of your regular pension contribution.

If you're part of an occupational pension, whereby you make regular contributions and your employer also does, then there will be more money funding your pension.

It is important to remember that there is actually an effective cap on how much you can pay into your pension every year, which is called the 'annual allowance', that cap is set at £40,000 or 100% of your pensionable earnings, by which we mean salary. If for example your salary is £30,000 than that would be your maximum allowance, whereas if your salary was at £50,000 then it would default to £40,000, the overall annual cap.

If you're in a workplace pension scheme then both your employer's contribution, in addition to your own contribution, goes towards the assessment for the annual allowance. If you exceed the annual allowance then you will face a tax liability on the excess over the cap.

When it comes to the annual allowance it's worth pointing out that the £40,000 cap is based on your gross contribution. Remembering what I said about tax relief, that the government adds £2.50 for every £10 contribution you make, £12.50 is therefore the gross contribution, while the £10 is therefore the net contribution. So thinking of that in terms of the annual allowance, if you had a net contribution of £32,000 that would attract tax relief of £8,000, giving you a £40,000 gross contribution overall.

If you don't have any pensionable earnings then you can still make a pension contribution of £3,600 gross, which is £2,880 before tax relief. As I said that is an annual allowance, so you can pay that in every year. You might for example want to pay into a pension for a child or a grandchild, where that individual doesn't have any pensionable earnings. In which case you would be able to contribute £3,600 a year as a maximum.

It is important to be mindful that any money that is going into a pension for a child is going to be there for a very long time, because currently you cant access pension benefits until you reach age 55.

In certain circumstances it is possible that if you haven't used your annual allowance in full for the previous three tax years, then you can actually carry forward some of that unused allowance and use it in the tax year currently. Please get in touch if you want to know about this further.

From the point you make your contributions to wanting to benefit from your pension this could be many years, and during that time your contributions will be invested. Most pension arrangements will offer you a wide variety of pension funds which you can choose from. Those funds will offer a varying degree of risk. The level of risk you ought to take will be based on a number of factors, which is being covered in our risk video.

One of the other advantages to pensions is that the investment returns achieved by the funds that you choose are not subject to tax. Although when you come to take benefits from the pension in the future, some of what you take out will be subject to income tax.

We hope you found this video about pensions interesting. There are different factors to consider for each individual, so if you have any specific questions then please get in touch.