April 2, 2024
[rt_reading_time] min read

What is a Pension?

One of the most powerful tools in a financial planners arsenal is the humble pension. Pensions offer a range of benefits that can significantly enhance your financial stability and peace of mind in later life. This blog post will explore how pensions can play an important role within a financial plan.

Simply, a pension is a type of long term savings plan that is designed to help you save money for later life. In order to encourage you to save for retirement, the government provide various tax advantages for saving into a pension.

Well, what are the benefits?

Tax relief on your contributions

Pensions are renowned for their tax advantages, making them an attractive option for retirement savings. Contributions to pensions benefit from tax relief at your highest marginal rate, meaning you essentially receive free money from the government on top of your contributions. For basic-rate taxpayers, this translates to a 20% boost, while higher-rate and additional-rate taxpayers can claim back even more. This added tax relief can help you build up your pension pot faster. The downside is that you cannot access your pension fund until 55 (increasing to 57 from April 2028).

Tax free growth

The contributions invested in your pension grow free of income and capital gains tax. This makes pensions a very tax efficient way of saving for retirement.

Tax free cash

Generally speaking, when you come to access your pension, you can normally take 25% of its value as a tax free lump sum. This could be used to provide you with a tax efficient income in retirement or be used to pay off your mortgage or go on that dream holiday.

Tax Planning

From a financial planning perspective, pensions are an important tax planning tool. Depending on a clients position, contributing money into a pension can reduce a capital gains tax liability, reduce a clients income tax liability, reinstate a clients income tax personal allowance, or wipe out a child benefit income tax charge. Therefore pensions provide scope for clever financial planning depending on the clients circumstances.

Estate Planning

Additionally, Pensions offer valuable estate planning opportunities, with certain types of pensions allowing you to pass on your remaining pension pot to your beneficiaries tax-efficiently upon your death. By carefully considering your pension options and making appropriate arrangements, you can ensure that your loved ones are provided for after you’re gone, leaving a lasting legacy for future generations.

And the Downsides?

At the end of the day, saving into a pension isn’t for everyone, and individuals should way up the pros and cons given their individual position. So what are some of the Cons?

  • Currently, you cannot access your pension until 55 (increasing to 57 from April 2028). Therefore, you need to be comfortable that you are giving up access to your money for a period of time.
  • 25% of your pension can normally be taken as an income tax free lump sum. However, the remaining 75% is taxable at your marginal rate of income tax.
  • Pensions can be seen as difficult to understand due to the rules and regulations surrounding them.
  • The value of your pension can fluctuate with the market and therefore your pension will go up and down over time.


Pensions are great tax planning and savings tool given the right circumstances. To see if pension saving is for you, then please feel free to get in touch via our contact page.

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