THE POWER OF PENSIONS
Add a little – gain a lot
HL WORKPLACE NEWSLETTER
Add a little – gain a lot
IMPORTANT NOTES
The information in this guide is designed to help you make your own informed decisions and is not personal advice. If you’re unsure whether a specific course of action is right for your circumstances, please ask about financial advice. Keep in mind that you can usually only access money in your pension from the age of 55 (57 from 2028), with up to 25% typically tax free and the rest taxed as income. Pension and tax rules can change and benefits depend on individual circumstances.
A pension is a way to save money for when you retire – providing you with an income for the years when you're not working, or if you choose to reduce your hours as part of a phased retirement. Pensions have some exciting superpowers which are worth getting to know.
Tax saving
Employer contributions and Salary Sacrifice
Compound growth
Once you know these pension secrets, you’ll need to understand how much you should be targeting to have saved up to help give you the retirement of your dreams.
How much should your pension be worth?
State Pension
Replacement income
Pension tax saving explained
To help you to save towards retirement, the government gives you money each time you make a payment to your pension. This is known as pension tax relief. The amount of tax relief you get usually depends on the rate of income tax you pay. If you’re a Scottish taxpayer, tax rates and bands are different, and so different rates of tax relief apply. There are two ways in which personal pension contributions can be deducted through payroll.
1. Contributing via ‘Salary Sacrifice’
Many workplace pensions use ‘Salary Sacrifice' (sometimes called ‘Salary Exchange’). It’s one of the most tax-efficient ways to pay into a pension. You give up (or ‘sacrifice’) some of your earnings and your employer puts it towards something else – in this case, your pension. The money goes straight into your pension before any deductions for Income Tax and National Insurance (NI). So you save both tax and National Insurance on your contributions.
2. Contributing via ‘Relief at Source’
Some workplace pensions deduct contributions directly from your net salary, after the deduction of income tax and National Insurance. Basic-rate tax relief is then automatically reclaimed within the pension. If you pay a higher rate of tax, you’d need to claim back any further tax relief from HM Revenue & Customs yourself. Remember that tax rules can change and benefits depend on individual circumstances.
20%
in basic-rate tax relief
Basic-rate taxpayers
If you’re paying the basic rate of tax, you’ll save 20% in income tax by making a pension contribution. In addition, you’ll also pay 8% less in NI if paying in via Salary Sacrifice. So a pension contribution of £1,000 would effectively cost you as little as £720.
Up to
45%
in higher rates of tax relief
Higher and additional-rate taxpayers
If you’re a higher-rate taxpayer, you can get up to 40% tax relief, in addition to saving 2% in NI if using Salary Sacrifice. So a £1,000 pension contribution could effectively cost you as little as £580. And for additional-rate taxpayers paying 45% income tax, a contribution of £1,000 could effectively cost as little as £530. Just be aware, you must pay sufficient tax at the higher or additional rate to benefit from the full 40% or 45% tax relief. And any higher or additional rate tax relief must be claimed back from HMRC directly if paying in via Relief at Source.
Read more about pension tax relief
Download our salary sacrifice vs relief at source factsheet
Compound growth
Regularly investing small amounts of money, letting any increases build upon themselves, and not touching it for the long term takes patience – but the results could really pay off. This is exactly what a pension is designed to do.
How to benefit from compounding
The best thing about compounding is that you don’t really need to do anything to benefit from it once you start. In fact, it works best when you leave your money invested. Imagine you invest £400 into a pension at the start of every month, and your investments grow by 5% after charges, with dividends and interest paid yearly. After one year, you'd earn £129. By the end of the second year, the growth would’ve reached £505 total. Fast forward by 20 years and your savings are worth £162,983 compared with overall contributions of £96,000.
The above is an illustration only, and not a projection of what your investments will be worth. The volatility of the stock market is not reflected in any of the tables. The annual growth rate actually achieved will depend on the performance of the investments chosen. Results do not take account of inflation. Remember the value of investments can fall as well as rise so you could get back less than you invest.
Tax “Traps” to consider
You could regain personal allowance
The personal allowance is the amount of income you can earn tax-free. For most people, it's £12,570 (2026/27 tax year). This allowance is reduced by £1 for every £2 you earn over £100,000. So, if your income reaches £125,140 or more, you lose your entire personal allowance, which is an effective tax charge of 60%. Pension contributions reduce your taxable income. If your income is over £100,000, contributing more to your pension can lower your adjusted net income – and this can restore some or all of your personal allowance. Keep in mind that you can’t normally access the money in your pension until age 55 (57 from 2028).
You could (re)gain / avoid losing access to Tax-Free Childcare
If you or your partner have an expected ‘adjusted net income’ of more than £100,000 in the current tax year, you will not be eligible for Tax-Free Childcare or the 30 hours of free childcare in England. If you can afford to reduce your income through pension contributions, you could be entitled to additional benefits. Tax rules do change so speak to a professional if you need to.
Child benefit
There is a High Income Child Benefit Charge (HICBC) if one parent has ‘adjusted net income’ over £60,000. The way it works is that you lose 1% of your Child Benefit entitlement for every £200 of ‘adjusted net income’ over £60,000, meaning that you don’t receive any once it reaches £80,000.
A personal pension contribution reduces your ‘adjusted net income’ and therefore any HICBC, meaning the effective cost of that contribution could be even less!
How can you check you’re on the right track?
By using HL’s pension calculator! With a few clicks you can see just how much difference paying in a bit more can make. If you don’t know how much is in your pot, log into your workplace pension account to find out.
