With the current pension landscape changing significantly in line with increases in life expectancy in the UK, planning for a sustainable retirement income is of utmost importance. The State Pension (Tier 1) presents fiscal challenges for the UK government so as longevity increases, the eligible age also increases. In an attempt to alleviate financial difficulties in later life, here are some useful tips to consider when planning retirement income in workplace pensions (Tier 2) and private/personal pensions (Tier 3).

Tier 2 – Workplace pensions

These schemes offer the dual benefit of employer contribution and tax relief to pension contributions. For individuals automatically enrolled into a workplace pension, the minimum contribution from employers is 3% and 5% for employees (8% minimum total contribution) for the 24/25 tax year.

Drawing from your workplace pension

The benefit of joining a Defined Benefit (DB) pension scheme is that it offers an indexed link, and guaranteed pension income for life. The normal retirement age to access pension income is usually set at 60 - 65 but depending on the rules of the scheme, you might be able to access your pension from age 55. DB schemes generally offer better income levels with no investment risk to individuals. In the event of employer insolvency, the Pension Protection Fund (PPF) ensures that members receive a portion of their benefits.

Access to Direct Contribution (DC) pension pots is usually through income/pension drawdown. With investments in this scheme linked to the stock market, there is the risk that funds may increase or decrease in value. Access to pension pots in this scheme is set to a minimum age of 55. However, you may be able to draw your pension early based on the rules of the scheme or if you are retiring early due to ill-health. Pension scheme payments that are made earlier than the minimum age may attract tax charges of up to 55%

Tier 3 – Private/Personal pensions

Personal pensions – these represent a DC scheme where individuals are able to make regular payments or lump sum payments to a chosen pension provider who will invest the money on their behalf. The amount paid into this scheme will help to determine the size of your pension pot but such investments are susceptible to market risks and usually attract administration charges by the pension provider. Contributions made to private pensions benefit from tax relief of 20%, which makes them a good savings option.

Self-Invested Personal Pensions (SIPP)- SIPPS provides a tax-efficient savings account which offers individuals flexible ways in which to invest their own savings based on their risk tolerance. Money can also be paid in as a lump sum or on a regular basis and tax reliefs of 20% (basic rate taxpayer), 40% (higher rate taxpayer) or 45% (additional rate taxpayer) are applied on SIPPs contributions for those under the age of 75 and are UK residents. SIPPs are also accessible to non-tax payers and offers a tax relief of 20%. Tax reliefs for SIPPs are capped at £60,000 for the 24/25 tax year, with any pension payments above that limit subjected to a higher rate of income tax. Unlike personal pensions, SIPPS provide greater choice and control over the ways in which funds are invested. Investment choices include shares, bonds, exchange-traded funds and unit trusts. The variety of options available with SIPPs indicate the potential for a higher level of return on investments, which also increases the risk of the investment.

Drawing your private pension

The age at which these pensions can be taken is usually at age 55 (although this is expected to rise to 57 by 2028). Lump sum payments can be taken but only 25% of this amount will be tax free. A useful option would be purchase an annuity, which is a life policy that converts money from a pension fund into a guaranteed income for a fixed duration or until death.

Other option

Lifetime ISA (LISA) offers an attractive retirement savings option for individuals between the ages of 18 and 40, and can be used to complement existing pension savings. It currently allows savings of up to £4,000 per year with the added benefit of a government bonus of 25% (up to £1,000 per year). For example £250 on contributions of £1000. It must be noted however that the £4,000 LISA limit is included in your annual Individual Savings Accounts (ISAs) limit of £20,000 for the 24/25 tax year.