Read time: 5 mins evestor HQ

Your top five pension questions answered

  • A pension is a great way to fund your retirement
  • But there are various types and they can be complex
  • evestor financial adviser Hayley Millhouse gives her insight

The average life expectancy is getting longer, making it even more important that you have a plan in place to prepare for life after work.

With that in mind, it’s surprising that many people are still in the dark about their pension options.

Research released last year found that over half of UK adults who are not already retired don’t know what age the state pension starts being paid.1

We're going to answer some of the most common questions people search online about pensions. But first, let’s take a quick look at some of the main types of pensions that are available.

The state pension

The state pension currently pays up to £125.95 a week2, but the age at which it starts being paid is increasing. By 2039, it will have gone up from 65 to 68 years old3, and many experts think further increases are inevitable4.

Workplace pensions

Because people are living to be older and claiming the state pension for longer, it’s putting a strain on the benefits system, so the Government introduced automatic enrolment into workplace pensions5.

You can get 20% tax relief on your contributions and can claim up to 25% more if you are a higher or additional rate taxpayer, which can go into your pension instead of being paid as income tax6. Most start paying out when you are between 60 and 65 years old.

There are two main types – defined contribution, where your retirement income could vary, and defined benefit, where your retirement income is guaranteed.

Self-Invested Personal Pension (SIPP)

A SIPP can be a simple and efficient way of saving for your retirement privately, outside of a workplace or state pension.

Again, you get tax relief of between 20% and 45% on money you pay in, and you can generally start getting money out when you reach 55.

Some common pension questions answered

1. Are pensions worth it?

In short – yes! One of the main benefits is that, when you pay into a workplace pension or SIPP, you can get money back from the Government in the form of tax relief.

It’s a way of encouraging you to prepare for your retirement and it effectively amounts to free money, so make the most of it.

2. Are pensions taxable?

We’ve seen how payments into pensions can get tax relief, but what about money coming out?

Any retirement income over your personal allowance is taxed, just like your wages are when you work. The personal allowance is currently £11,850, but this could change in the future.

However, pension freedoms introduced in 2015 mean people now have much more control over how to manage their pension savings than ever before, and you can take up to 25% of your pot as a tax-free lump sum when you retire.

So, a basic rate taxpayer who has paid £100,000 into their pension will have received 20% tax relief, leaving them with a £125,000 pot.

On retirement they can take 25% of that - £31,250 - as a tax-free lump sum. The rest is taxed at 20% as and when they take it out, though people with a higher income could pay more.

3. Are pensions protected?

Many people want to know if their pension would be safe if their employer were to go bust.

This depends on what kind of pension you have, but there are safety nets should the business go into administration - as long as your pension provider is authorised by the Financial Conduct Authority, like evestor is.

Most workplace pensions and SIPPs are covered by either the Financial Services Compensation Scheme or the Pension Protection Fund, but there are caps placed on the levels of compensation that are available, so you might not get 100% of your money back7.

4. Are pensions paid for life?

Your state pension is currently guaranteed for life8, but it only provides a limited income – currently £6,549 a year.

With a workplace pension, it depends on a range of factors, from what kind of scheme your employer offers and how much you have paid in to the pot, to how old you are when you take retirement.

Generally, the earlier you start paying into a pension, including SIPPs, the more money you are likely to have when you retire and the more secure your income will then be.

And it’s always important to remember that, just like other kinds of investments, your capital is at risk.

5. Will my pension be enough money?

That all depends on your current arrangements and the kind of lifestyle you would like.

Everyone has different ambitions for their retirement, but evestor can review your current pension products.

That might mean transferring your existing pension into a new scheme, or consolidating more than one pension into a single pot so you pay less in fees.

Book a consultation with one of our advisers and we’ll only recommend what’s in your best interests.