What is a pension?

In this section we will cover:

• What types of pensions are available to savers
• Who can benefit from pensions
• How to manage and access your pensions

Types of pensions

There are different types of pensions available to you depending on your employment status.

Workplace pensions

A workplace pension is a vehicle that helps you save for your retirement that is overseen by your employer. Since 2012, most UK workers have been automatically enrolled into workplace pensions provided they meet eligibility criteria.

There are three types of workplace pension.

Defined contribution: A defined contribution (DC) pension builds a ‘pot’ of money for your retirement. In a workplace DC pension scheme, you will pay into this pot via contributions from your salary, while your employer will also pay contributions in, provided that your annual income meets the minimum qualifying threshold. This money is then invested in assets including company shares, bonds and property. The value of your pension can therefore go up or down depending on how it’s been invested.

Defined benefit: A defined benefit (DB) pension guarantees you a pension at retirement, which is based on your salary, length of service plus other scheme specific factors. Some companies offer a career average scheme (also known as CARE and a type of defined benefit scheme), where the money you receive is based on your average salary, rather than your final salary. DB schemes are less common now and typically only offered to new employees in the public sector, such as education and healthcare.

Personal pensions

A personal pension is a savings product that is available to individuals who want to bolster their retirement savings in addition to any workplace pension scheme. You can set up a personal pension yourself. Most can be started from the age of 18, while it’s possible to open one on behalf of someone younger. As contributions into a personal pension scheme are made directly by customers, they are eligible for at least 20% tax relief from HMRC which is automatically claimed on your behalf. However, once you reach the age of 75, while you may still be able to contribute, your contributions will not be eligible for any tax relief. 

They are also ideal for the self-employed, who do not have an employer to oversee a retirement plan on their behalf. Someone who is not working or earning can also open a personal pension, although this could depend on the pension provider. They can contribute up to £2,880 per year (net), which is topped up to £3,600 with tax relief. Personal pensions typically take the form of DC pensions, and together with workplace pensions fall under the umbrella of private pensions.

There are three main types of personal pension:

1. With a ‘simple’ personal pension, you’re most likely to make regular contributions to your pension, which will be managed by a pension provider. The provider should offer various investment strategies for you to choose from depending on your personal circumstances and attitude to risk. J.P. Morgan Personal Investing offers this kind of pension.
2. A stakeholder pension is similar to the simple version, except there are strict government rules about how they’re managed. Stakeholder pensions have low minimum contribution amounts, only a few investment options and caps on how much the provider can charge you.
3. A self-invested personal pension (SIPP) is a type of personal pension that lets you manage how your money is invested. You can choose which investments to invest your money in and can actively manage those investments. It can also offer a wider range of investments than a standard personal pension.

J.P. Morgan Personal Investing provides ‘simple’ personal pensions. Our customers choose how they want us to manage their pension in line with their appetite for investment risk and preferred available investment style. They can access projections that can forecast the future value of their pension.

State Pension

The State Pension provides a retirement income from the government that individuals can claim when they reach State Pension age. Individuals need a minimum of 10 qualifying years of National Insurance contributions to receive any State Pension. The amount you receive can change, and you can learn more about the State Pension via the UK government's website.

Why you should save into a private pension

There are several reasons why it makes sense to contribute towards a private pension.

1. Tax relief on pension contributions

While it’s possible to amass wealth via other means – for example, through property, or a Stocks and Shares ISA – contributing towards a pension confers special tax advantages for savers.

You can get tax relief on private pension contributions worth up to 100% of your annual earnings, as the government adds 20% tax relief to any contributions you put in up to a certain limit. If you’re a higher or additional rate taxpayer, you can claim even more via your tax return form.

2. The State Pension alone will not fund a 'comfortable retirement'

The Pensions UK trade body estimates that a one-person household will need £43,900 a year to fund a comfortable retirement, which Pensions UK defines as a retirement with “more financial freedom and some luxuries”. A two-person household, meanwhile, needs £60,600 per year to fund a comfortable retirement.

For now, savers will therefore need to rely on sources of income in addition to the State Pension once they’ve finished working if they want to enjoy a comfortable retirement.

If you stop contributing to your workplace pension, meanwhile, your employer may stop paying in too – meaning that, effectively, you are being paid less than those paying into a pension.

3. Benefit from tax-free compound returns

The earlier you can start saving into a pension, the better. One of the best arguments for investing over a long time period – for any investment product – is to capture the benefits of compound returns.

By regularly contributing towards a pension that invests in financial markets, your pension pot can grow bigger over time and without incurring tax. Your contributions will invest fresh capital, plus the returns that you may have received from your previous investments. The effect of compounding returns can have a substantial impact over the long term. The compound return of an investment represents the total change in value over time of an amount of money invested, reflecting all gains and losses incurred.

4. The self-employed aren’t saving enough for retirement

Many self-employed workers are far behind their employed counterparts when it comes to retirement saving.

According to the Institute for Fiscal Studies (IFS), since the early 2010s only 20% of self-employed workers making annual profits of more than £10,000 are saving into a pension. While employees typically increase their pension contributions as their earnings grow, many of the self-employed hold their contributions at the same level for successive years, rather than increasing them as earnings grow, the think-tank found.

Most alarmingly, if the self-employed were to keep accruing private pension wealth at their existing rate, the IFS forecasts that approximately 55% of self-employed workers would not have any pension savings to supplement their state pension entitlement in retirement.

When can I access my pension?

Once you turn 55 (this will rise to 57 in April 2028) you can access your pension via income drawdown while keeping the rest invested. You’re able to take 25% from your pension tax-free, with subsequent withdrawals taxable at your marginal rate of income tax. The most you can take tax free across all your pensions is subject to the lump sum allowance which is currently £268,275, although a protected allowance may allow more.

If you would prefer, you can take a series of smaller payments as and when you want, of which each payment will be 25% tax free, subject to the maximum allowance. You can also access your pension at any age if you are terminally ill with less than 12 months life expectancy.

Where are my pensions?

If you’ve had multiple employers, you might have multiple workplace pensions, and the prospect of tracking down your pensions may be daunting – particularly if you haven’t got the paperwork for them.

The first place to look for lost workplace or personal pensions is in your pension statements, which you should receive each year. The statements should give information on your pension provider, who to contact if you want to find out more about your pension, and an estimate of your retirement income from that pension pot.

If you haven’t recently received any pension statements, you should contact your old employers and pension providers to ensure they have the correct contact information for you.

If you’re tracing a workplace pension set up by a former employer, contact that employer and ask for the pension provider’s details. When you contact the pension provider, it will be helpful to know your National Insurance number.

If you’re trying to find a personal pension and know who your pension provider is, contact them for information about your pension. Provide as many of the following details as you can: date of birth, National Insurance number, pension plan number and the date the pension was set up.

You can also use the government’s Pension Tracing Service to try to find your lost pensions. This is a free online service that searches through a database of workplace and personal pension schemes to help you find your pension provider contact details, while you can also trace your pensions by phone or post. The pension tracing service, if they are able to help you, will provide you with the pension provider’s current name and contact details. You can then contact them for your pension information.

Can I consolidate my pensions?

Combining your pensions should make it simpler for you to keep track of how much you’ve put aside for later in life, where your money is invested and how it’s managed. You can consolidate your pensions and still have a good spread of assets and a diversified portfolio. You could combine all your pensions with one of your existing pension providers or transfer them all to a new provider.

If you put all your pensions together with one provider, you may have less paperwork and administration to do. You may even be able to save on fees if you consolidate your pensions. You may, however, also incur fees for transferring or consolidation, such as exit fees.

Consolidating pensions isn’t necessarily right for everyone and it may be that, due to the type of pension schemes you have, it won’t be possible to do. Before you transfer, check you won’t lose any guarantees or benefits and that you know what charges you may incur. During any transfer, your investments will be out of the market. If you are unsure if a transfer is right for you, please seek financial advice.

What happens to my pension if I move abroad?

If you have a DC pension, you have two options for what you can do with your pension if you move abroad. You could:

• Leave your pension in the UK and draw down your money in the country you reside in, or
• Move your pension to an overseas pension scheme.

If you leave your pension in the UK, your options for how you take the pension will be the same as if you’re living in the UK. Your pension provider could transfer a pension into an overseas pension scheme, but please check with your provider in case a fee is payable. Your provider could pay your pension into a UK bank account for you to then withdraw from or transfer to an account in another country.

If you want to transfer your pension to another country, you may be able to transfer it into an overseas pension scheme. The overseas pension scheme must be a QROPS. If it’s not a QROPS, you’re likely to have to pay a tax charge, and your UK pension provider could even refuse to transfer it.

Certain conditions need to be met to transfer a pension abroad, and you may need to pay costs. It’s also possible that transferring it will change the amount you receive when you retire, but you’ll need to check this with your provider. In the event the total transfer value exceeds the overseas transfer allowance, which is currently £1,073,100, you will be required to pay a 25% charge to HMRC on the excess amount.

It may be possible to pay into a UK pension if you live abroad, although check the scheme rules with your pension provider. Even if you can pay into a UK pension while living abroad, you might not qualify for tax relief on your contributions.

Any benefits received from your UK pension will be subject to income tax unless you are a non-UK resident, in which case you might not be required to pay income tax on your state pension. The tax you pay will depend on whether you are resident in the UK and/or any other jurisdiction.

If you’re classed as a UK resident, for tax purposes, you may have to pay UK tax pension income and you might have to pay UK tax on your other pension income.

If you’re classed as a non-UK resident, for tax purposes, you won’t usually have to pay UK tax on your state pension, but you may still have to pay UK tax on any other UK pension income.

You will be subject to the tax rules in any country you are resident in. If that country doesn’t have a double taxation agreement with the UK, you might have to pay tax in both countries.

Can I transfer my pension to J.P. Morgan Personal Investing?

You can transfer most pensions to J.P. Morgan Personal Investing with the exception of some defined benefit schemes or a scheme which you enrolled in at your current employer, due to losing out on certain benefits and/or guarantees.

To transfer a pension to J.P. Morgan Personal Investing, please visit our transfer page. We do not charge setup fees, but you may want to check any exit fees with your current pension providers, or any benefits you may lose as a result of transferring.

Where do pensions fit alongside other sources of retirement income?

Pensions can be used in combination with other sources of retirement income – for example, a Stocks and Shares ISA, a Lifetime ISA (LISA), or property income. Different investment products and assets all confer a range of features, including different tax reliefs, and it can be useful to have a variety.

A Stocks and Shares ISA, for example, is an effective way to invest your savings and access this money sooner than if it had been placed in a pension. The LISA, which uses a 25% government bonus up to £1,000 per year to encourage younger savers between the ages of 18 and 39 to save for their first home, or retirement, may also be appealing. A personal pension managed by J.P. Morgan Personal Investing remains a straightforward way to save over the long term for your retirement, while benefitting from tax relief along the way.

What the J.P. Morgan Personal Investing products all offer in common is the opportunity to put your money to work. While the value of your investments may increase or decrease, a common alternative to investing – keeping your money in cash – can leave your savings vulnerable to the impact of inflation.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. Pension/ISA/LISA eligibility rules apply. With LISAs, government withdrawal charges may apply. Before transferring, check you won't lose any benefits or pay any unexpected charges. During a transfer, your investments will be out of the market. Seek financial advice if you're unsure if a transfer is right for you. Tax rules vary by individual status and may change. This is general information, not personalised tax advice.