Guide to pensions and retirement | Maximise pension today

Heritage’s guide to pensions and retirement

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    Retirement is one of the biggest events in anyone’s life, up there with buying your first home and getting married. And just like those other major life events, your retirement requires careful planning and preparation before you pull the trigger.

    As life expectancy continues to increase, it’s more important than ever to ensure that you have a financial plan in place to support your retirement goals. In the UK, pensions are often a critical component of retirement planning, with favourable tax benefits and potential income streams to support you in your post-working years.

    Planning your retirement now will allow you to put your feet up, relax and have a much more stress-free retirement journey.

    In this guide, we’ll share our insights and expertise to help you make informed decisions about your retirement and pension planning. From understanding the different types of pensions available to optimising income in retirement, we will cover key topics you need to take into account to plan for a happy and financially secure retirement.

    As a financial advisor in the UK, Heritage has worked with clients from all walks of life to help them navigate the complex world of retirement planning and pensions. Whether you’re just starting to think about retirement or are already well on your way, we can provide you with practical advice and strategies to help you achieve your retirement goals.

    Call us today to arrange a free initial consultation.

    What different types of pensions are there in the UK?

    Broadly speaking, there are three types of pensions:

    • Workplace pension
    • Personal Pension
    • State pension

    Workplace Pension

    A workplace pension is one that is provided by your employer. These have become increasingly common, with employers having to enrol certain employees into a pension scheme automatically.

    Workplace pensions come in two forms:

    • Defined Contribution, AKA money purchase.
    • Defined Benefit, AKA ‘final salary’ pension.  

    What is a defined contribution pension?

    In a defined contribution pension, the value is determined by the contributions and investment performance.

    The contributions are made into the pension, which is then invested into a fund. This builds up a pension fund which can usually be accessed at the earliest age of 55.

    When you come to access the benefits from your pension, there are several options. 

    What is “final salary” pension scheme?

    A final salary pension is one which pays you a regular, guaranteed income for life. As such, they are often referred to as ‘gold plated’. The amount of pension will depend on various factors such as your length of service, salary and the rules of the particular pension scheme. 

    These pension schemes are a dying breed, although they are more prevalent in the public sector, such as the NHS. 

    Private or Personal Pensions

    A personal or private pension is one in which you take out yourself. This could be if you are self-employed or perhaps you wish to make additional contributions or take an interest in managing your investments.  

    The State Pension

    The State Pension is one provided by the government once a person has reached state pension age, should they meet certain qualifying conditions. It is paid every four weeks. When you reach state pension age depends on when you were born, and the date can be found online.    

    In order to receive a basic state pension, you will need at least 10 qualifying years of paying the necessary National Insurance contributions. 

    If you have 35 qualifying years or more, you will receive the full state pension. As of the 2022/23 tax year, the full state pension is £185.15 per week. The state pension increases each year by what’s known as the ‘triple lock’.

    This means it will increase each year by the higher of

    • Average earnings
    • Inflation, the Consumer Prices Index (CPI)
    • 2.50%

    Considering pension options

    When considering a defined contribution or ‘money purchase pension’, there are various options available to you. Each has its own advantages and disadvantages, and the best option depends on your personal circumstances.

    The options are:

    • Purchase an annuity (a guaranteed income for life).
    • Flexi Access Drawdown or ‘Drawdown’.
    • Withdraw the whole pot as an Uncrystallised Fund Pension Lump Sum (UFPLS). 25% will be tax-free.
    • Take a number of UFPLS.
    • Take only your tax-free cash.

    For more information on each of these options, please read on. 

    Purchasing an Annuity

    An annuity provides a regular guaranteed income at retirement. The amount can be fixed, or it can increase to try and rise with inflation. An annuity is paid for life and will stop when you die. It is possible to include a guarantee so that it provides a reduced income to your spouse.

    It is also possible to select an annuity which is guaranteed to pay the full amount for a number of years. You can buy an annuity with either all of your pension or just a proportion of it.  The level of income will depend on various factors, including: 

    • The value of your pension fund
    • Your age 
    • Your health and underlying medical conditions
    • Prevailing annuity interest rates at the time of purchase 

    Once you have purchased an annuity, you cannot change the level of income or switch income strategy. Therefore, it is important you are aware of the full facts.  

    Annuities were often seen as poor value during the ultra-low interest rates of recent years. However, they have improved as interest rates have increased dramatically since the beginning of 2022.  

    What are the advantages of an Annuity?

    •  As the annuity income is guaranteed, there is no risk of it running out.
    • It carries no investment risk for the policyholder. This can be useful for retirees who are quite cautious and would be concerned if their pension fund remained invested.
    • As the amount of income is guaranteed, this can be used to meet essential expenditures.
    • If you select an annuity that increases with inflation, the income is protected in real terms.

    What are the disadvantages of an Annuity?

    • The amount of income cannot be changed from year to year. This could be disadvantageous if you wished to take a higher level of income during the earlier, more active years of your retirement.
    • Once you die, the annuity will die with you. You can include a spouse’s guarantee, but this will reduce the initial amount of the annuity.
    • It is possible that you die before being paid an amount equivalent to the pension fund value used to purchase the annuity.


    What is a Flexi Access Drawdown?

    Flexi Access Drawdown is commonly known as ‘drawdown’. Drawdown allows you to take flexible withdrawals from your pension fund. It allows you to take as much or as little income as you like.

    The money that is not taken as income remains invested to try and grow the pension fund and support withdrawals in future years.

    As the remaining pension fund remains invested, it is subject to stock market volatility. A combination of poor stock market performance and high withdrawals can cause you to run out of money before you die. 

    The main benefit is, of course, flexibility. However, this can be a double-edged sword. According to the Financial Conduct Authority (FCA), 40% of regular withdrawals in the 2021/22 tax year were withdrawn at an annual rate of 8%.

    A safe withdrawal rate from a drawdown plan is thought to be between 3-5% a year, which shows the risk of drawdown and excessive withdrawals.  

    What are the advantages of a Flexi Access Drawdown?

    • As the name suggests, it affords you more flexibility. This means you can shape the income around your circumstances. Many people prefer to take a higher degree of income in the earlier years of retirement when they are in good health and before the state pension commences.
    • If you die, your pension can be passed on to your family/loved ones. This is not possible with an annuity. The remaining pension fund will not be subject to inheritance tax.

    What are the disadvantages of a Flexi Access Drawdown?

    • As there are no guarantees, you could potentially run out of money and extinguish your pension fund.
    • As the remaining money is left invested, it is subject to investment risk. Stock market falls could reduce your pension pot.
    • The flexibility can result in higher withdrawals which can affect the sustainability of the pension fund. 

    Uncrystallised Fund Pension Lump Sum (UFPLS)

    With this option, you can opt to either take the whole pension pot as a lump sum or take a series of smaller regular payments. 

    25% of the amount will be paid as a tax-free lump sum, and the remaining 75% will be classed as taxable income. 

    You should be wary of taking your whole pension pot as a lump sum unless you absolutely have to. This could generate a significant tax liability. If you take any taxable withdrawals from your pension fund, you will be subject to the Money Purchase Annual Allowance (MPAA). This means the limit on your pension contributions, which can attract tax relief, is capped at £4,000 per year. 

    If you are retired and no longer making pension contributions, this may not be an issue. However, if you are still working or looking to make pension contributions in excess of this amount, this is something to be aware of. ion, if your Cash Equivalent Transfer Value (CETV) is more than £30,000, it is compulsory you seek financial advice

    Tax-Free Cash ‘Pension Commencement Lump Sum’

    Typically with most Defined Contribution pension contributions, 25% of the pension fund is tax-free, although in some rarer cases, it can be more than this. The tax-free cash from a Drawdown pension can be taken in one go, or it can be staggered in a series of smaller payments. 

    If you do not need the tax-free cash immediately or all in one lump sum, it can be a good idea to leave the money invested as your eventual tax-free cash could be larger if your pension fund benefits from investment growth.   

    Transferring a Defined Benefit ‘final salary’ pension

    It is sometimes possible to transfer a Defined Benefit pension to a Defined Contribution pension to receive a lump sum. 

    Although the headline transfer value amount can be tempting, along with other benefits such as being able to access your benefits flexibly and often better death benefits. However, transferring a Defined Benefit pension can be considered high risk, as you will be potentially giving up a guaranteed, inflation-increasing pension income.     

    Can I transfer my Defined Benefit pension?

    For certain Defined Benefit pensions, which are known as ‘unfunded’, you are unable to transfer these as they are paid for by the taxpayer. This includes many public sector pension schemes such as the NHS and armed forces.

    If your pension has been transferred to the Pension Protection Fund, then you will be unable to transfer your pension. Your pension will be transferred to the Pension Protection Fund when the pension scheme sponsoring employer becomes insolvent, and the liabilities of the scheme exceed the assets.

    Advantages of transferring a Defined Benefit pension

    Transferring to a flexible Defined Contribution pension has some advantages, which include: 

    • You can access your pension at an earlier age without being penalised.
    • You can take your benefits flexibly.
    • You may have a greater tax-free cash amount in monetary terms.
    • The death benefits tend to be better than a Defined Benefit pension. This could be important if you have a family you wish to take care of or if you have any health issues.

    Disadvantages of transferring a Defined Benefit pension

    It is worth highlighting that the Financial Conduct Authority’s (FCA) starting point is that transferring a Defined Benefit is not suitable for an individual.

    This is because of the disadvantages, which include:

    • You will be giving up a guaranteed income stream in return for a pension that will be subject to investment and longevity risk. There is the possibility the pension fund could run out during your lifetime.
    • If you have no investing experience, you could panic during market fluctuations.
    • You will be responsible for making investment and income strategy choices. 

    Is there a requirement to take advice when transferring a defined benefit pension?

    Due to the risks involved with transferring out of a Defined Benefit pension, if your Cash Equivalent Transfer Value (CETV) is more than £30,000, it is compulsory you seek financial advice. 

    Do you get tax relief on pension contributions?

    Yes, in the UK, you can get tax relief on contributions to a pension. When you make contributions to your pension, the Government also adds money to your pension in the form of tax relief. This is done to encourage people to save for retirement and reduce the pressure on state benefits.

    The amount of tax relief you can get depends on your income tax rate. If you are a basic-rate taxpayer, you will get tax relief on your pension contributions at the basic rate of income tax, this is currently 20%. For example, if you contribute £1000 to your pension, the government will add £250 in tax relief, making the total contribution to your pension £1250.

    If you are a higher or additional rate taxpayer, you can get tax relief at the higher rate of 40% or an additional rate of 45%, respectively. However, the difference is the government will still only provide 20% into your pension pot, and you will need to claim either the additional 20% or 25%, respectively, through your self-assessment.

    What is tax relief on pension contributions?

    To encourage savers to pay into a pension and make retirement provisions, the government offers ‘tax relief’ on pension contributions.

    How much is tax relief?

    The exact amount of tax relief will depend on your income tax rate.

    If you are a Basic Rate taxpayer, you will receive an extra 20% on your contributions. If you are a Higher Rate taxpayer or Additional Rate taxpayer, the tax relief will be at 40% or 45%, respectively.

    What this means is that for a Basic Rate or Higher Rate to make a gross (total) pension contribution of £100, you would only need to contribute £80 or £60, respectively.

    How tax relief works on pension contributions

    How much can I pay into a pension?

    In theory, there is no limit on the amount you can pay into a pension, but there is a limit to your contributions that will benefit from tax relief. This is known as your ‘Annual Allowance’.   

    This limit is the lower of £40,000 or your ‘relevant’ earnings. Relevant earnings mostly cover your employment income, such as your salary, wages, bonuses or overtime.

    If you were employed and earned £30,000, this would mean your annual allowance, the gross amount you can put into your pension and receive tax relief, would be £30,000. If your salary was £50,000, your annual allowance would be £40,000.  

    What if I am retired or have no salary

    If you are retired, unemployed or a homemaker, this doesn’t mean you cannot make a pension contribution and benefit from the valuable tax relief. 

    If this is you, you can still contribute £2,880 per year and receive £720 tax relief which would make the gross pension contribution £3,600 per annum. 

    However, it is not possible to continue contributing to your pension beyond age 75.  

    What if I want to make a pension contribution greater than £40,000?

    If you want to make a pension contribution greater than £40,000, it is possible to make a greater pension contribution by carrying forward your unused allowance from the previous three tax years. 

    As an example, John earnt £60,000 in the past 4 tax years and had only made £5,000 pension contributions in each of those tax years. 

    He has received an inheritance of £200,000 and is interested in making a large pension contribution.


    19/20 Tax Year 

    20/21 Tax Year

    21/22 Tax Year

    Current tax year (22/23)

    Annual Allowance





    Contributions made





    Unused Annual Allowance





    Using this example, Bob would be able to make a gross pension contribution of £140,000.  

    What income do I need for a comfortable retirement?

    This depends on a variety of things, such as your desired lifestyle, desired expenditure and how long you live.

    A rule of thumb that you may have heard before is the “4% rule”. This rule suggests that you should not withdraw more than 4% of your invested retirement pension each year in order to avoid running out of money. So, if you want to have an income of £40,000 per year in retirement, you would need to have a pension savings pot of at least £1,000,000.

    This rule is, unfortunately, not a one-size-fits-all solution. Everyone’s individual needs are different and will vary between each person’s own circumstances. For example, if you have a bucket list that involves extensive travel plans in your retirement, you are going to need to budget for higher expenses. Similarly, if you plan to downsize your home or relocate to a lower-cost area, you may be able to get by with a lower retirement income.

    Retirement Living Study

    What income do I need for a comfortable retirement?

    In 2021, the Retirement Living Standards (RLS) found that for a minimum, moderate and comfortable retirement, a single person would need the following levels of income:

     Type of Retirement   Minimum  Moderate 

    Retirement income




    The 50-70 Rule of Thumb

    A crude rule of thumb to calculate how much you need to retire is between 50-70% of your average salary.

    As an example, if you live comfortably on a salary of £45,000, a comfortable income in retirement would be anywhere between £22,500 and £31,500. The full state pension for a 66-year-old today comes to £9,627.80 per annum (£185.15 a week), but the remainder will need to come from your self-invested personal pension.

    10 times your current salary

    Another rule of thumb is to take your salary and times this by ten. Using a salary of £45,000 again would require a pension pot of £450,000.  

    How to achieve an income of £23,300

    In order to achieve a ‘moderate’ retirement, an individual needs an income of £23,300. If we assume an individual receives a full state pension of £9,627, this leaves a shortfall of £13,673.  

    Meeting the shortfall via an annuity

    For a 66-year-old who is in good health to purchase an annuity with a spouse’s pension for £13,673 that increases with inflation, they would need a fund value of £342,000.   

    Meeting the shortfall via drawdown 

    For a 66-year-old who is in good health, according to the Office for National Statistics, the average life expectancy for a man is 85 and for a woman, it is 87 years of age. This translates to a retirement of around 19-21 years. 

    To take an income of £13,673 that increases in line with inflation from a drawdown pension that grows by a conservative 5% a year, with the fund extinguished in 20 years, you would need a starting fund value of £223,622. 

     Therefore, to achieve a ‘moderate’ standard of living in retirement as defined by the Retirement Living Standards, a 66-year-old should aim for a pension fund of at least £220,000-£350,000.

    However, it is worth bearing in mind the following:

    • The state pension age is only likely to increase, which means you will privately have to fund more of your expenditure and places an additional burden on your own retirement provisions.
    • Investment returns could be poor in future years, which could affect retirees in the drawdown. This could result in lower fund values for savers and also affect the sustainability of income from drawdown arrangements.  
    • This does not account for potential care costs, which could significantly increase retirees’ expenditures.
    • Life expectancy could increase faster than predicted, and your retirement could be longer than forecasted. This would mean you need a larger pension pot at the outset of retiring/saving more during your working life.
    • Prices and inflation could increase faster than expected.    

    What can you do to turbocharge your retirement planning?

    Increase your pension contributions

    Auto-enrolment has helped address the looming pension crisis many Britons will face here in the UK. The minimum auto-enrolment requirement for eligible jobholders is set at 8%. This equates to 3% from the employer and 5% from the employee. Whilst this is a good first step, it doesn’t go far enough. It is generally thought that you should be saving at least 15% of your income. 

    To get closer to this threshold, if your affordability allows it, you could ask your employer to double your contributions to 10%, which would make the total contribution 11%. 

    One tactic we often suggest at Heritage is to make a pension contribution when you receive a bonus or are reimbursed for expenses.

    Review the investments in your pension and invest in an appropriate fund

    It may be worth checking your pension provider to see what fund you are invested in. You may find your pension company has invested you in a default fund which could be a ‘balanced risk’. This may be appropriate if you are closer to retirement or have a low tolerance for investment risk.

    However, if you are prepared to accept more volatility with your investments and have a long investment time horizon until retirement, it could be appropriate to take a higher degree of investment risk with your money or look at a lifestyle fund. 

    By checking out an additional 1% in investment growth, although this doesn’t sound like much, over a long time horizon, this can add up dramatically thanks to the power of compound interest. 

    Using an example, let’s assume John contributes £200 per month towards his pension; he is aged 25 and will retire at age 65 (40 years). Look at the difference if he was able to earn an additional 1% on his investments, from 7% to 8%:

    For what could take less than half an hour to check, this could add £158,812 to your retirement and net worth! 

    Review the investments in your pension and invest in an appropriate fund

    Work longer or spend less!

    If you are approaching retirement and it appears you do not have enough to retire on or it looks like you could run out of money within your life expectancy, this leaves you with a few hard choices.

    One of which is to retire later. By doing so, not only do you have longer for your money to compound, but you will also shorten the amount of time you are no longer earning and withdrawing funds from your retirement funds. 

    What happens to my pension when I die?

    The answer varies with different pensions.  

    Defined Contribution ‘Personal Pension’

    If you pass away either before or even after you start to take a flexible income from your Defined Contribution pension, then you can pass your pension to anyone you nominate as a beneficiary. 

    If you die before age 75, then the remaining fund can be passed to your beneficiaries tax-free, and they can take the remaining funds either as a tax-free lump sum or a regular tax-free income. 

    If you die after age 75, then the remaining fund can again be passed to your beneficiaries, but they will have to pay tax on any withdrawals (lump sum or income) they take at their marginal rate of income tax. 

    Importantly, under current legislation, a Defined Contribution pension will not form part of your estate, which means the value is usually exempt from Inheritance Tax.  

    That’s why for families with other assets and income streams, leaving Defined Contribution pensions invested to act as a legitimate Inheritance Tax vehicle to pass wealth onto their loved ones and future generations. 


    The answer will depend on the annuity that was chosen from the outset. 

    If the annuity selected was on a single life, then the annuity payment will die with you. You can select to have a minimum guarantee period which is usually 5-10 years, which means the annuity will be paid in full for this time. 

    You can opt to include from the outset a spouse or civil pension, which is often 50% of the original amount if you pass away.    

    Using the above example, if John receives an annuity of £10,000 per year that has a spouse pension of 50%. If he was to pass away, his wife Sharon would receive an annuity payment of £5,000 per year. 

    Defined Benefit ‘Final Salary’ pension in payment

    If you are in receipt of a final salary pension, what happens to your pension will vary from scheme to scheme. 

    Usually, most schemes will include a spouse and civil partner pension if you die. The exact percentage will also vary from scheme to scheme, but this is often around 30-60%, with 50% being the most common. 

    If you die and you are unmarried or in a civil partnership, then your pension scheme may be able to pay a dependent pension to a person who was not married or in a civil partnership, provided they can prove they were dependent on them.   

    Maximise your pension investments with advice from Heritage Financial Planning

    When it comes to your pension, deciding on which path to take can be daunting. The wrong decisions could cost you thousands of pounds or land you with an unmanageable tax liability. Heritage Financial Planning is here to help you navigate your choices and guide you on the right path to maximising your pension pot.

    Our close-knit team of financial advisors will go to great lengths to understand your individual circumstances and goals. As independent advisors, our only motivation is to help you achieve the best return on your pension contributions.

    For peace of mind when planning for your future, contact Heritage today. To arrange a free initial consultation, please fill in our contact form.

    In summary

    As with most matters relating to financial planning, the key is to be prepared as early as possible and have a good understanding of the options available to you.

    A little proactive planning well in advance of your retirement date could make the difference between a minimum or a comfortable retirement and avoid you from working for longer than you want.

    Alex Norman-Jones​

    Alex Norman-Jones​

    I am one of the founders of Heritage and I am highly motivated to deliver bespoke financial planning solutions to my clients.

    Contact Me Today

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