- How does your pension work?
Your pension is a valuable benefit. Here is a quick snapshot of how it works.
Your pension is a simple and cost effective way for you to save for your retirement. It is defined contribution and this means it works a bit like a savings account:
- Money goes in – While you are an active member, you and your employer contribute to your retirement account every month. The Government also provides a number of tax incentives to help you save more.
- You help your savings grow – You choose where to invest your retirement account from a range of investment options. How much your savings grow by will depend on how your investments perform, how much money goes in and when you retire.
- You use your account to support you in retirement – When you retire you can use the money you have saved to provide an income – there are a number of different income options you can choose. You can also take some of your money as a cash lump sum (currently up to 25% is tax free and the rest is taxed as income).
- What other benefits are offered?
To find out more please read your scheme guides, referred to in the "Related Documents" section →
- How can I develop my knowledge and understanding of pensions?
Carefully read the information we send you such as your annual statements, newsletters and brochures.
It is also important to think about how you want to live in retirement and what income will be used to support this. You can then log in to your account to see if you are on track to achieving your retirement goals. You can see the value of your benefits and use the modeller to see the effect of paying more into your retirement account.
It may also help to speak to an Independent Financial Adviser (IFA) and get tailored advice that suits you.
- Your retirement options
New rules from April 2015
The government introduced radical changes to how you can take your benefits.
From 6 April 2015 you can use your retirement account in the following ways:
- Take a cash lump sum - you can normally take the first 25% tax free (note anything over 25% will be treated as income and as such could push you into a higher tax bracket).
- Use part or all of your retirement account to provide a guaranteed regular income for life.
- Transfer your account to another arrangement (if for example you wish to draw down regular amounts each year).
Help and support
The Government has arranged for all members to have access to free and impartial guidance when they retire to help make informed decisions. The service is available to anyone aged 50 or over and can be accessed by visiting https://www.pensionwise.gov.uk/ or by phoning 0800 138 3944.
We do not provide legal or other services and are entitled to assume that you will rely on other professional advisers for the provision of such advice, including (but not limited to) legal, tax, audit and accounting advice.
- Tax and pensions
To encourage you to pay into a workplace pension there are a number of tax incentives for contributions and benefits. However, some limits and restrictions apply.
Tax relief on your contributions
If you make your own contributions to your pension, the Government will boost your savings in the form of tax relief. You may not currently be making contributions to the Affinity Water Pension Plan, but you will be entitled to tax relief if you are making contributions to another pension arrangement.
There is a limit on how much your pension can grow each year while you receive full tax relief. This is known as the Annual Allowance and is currently £40,000. Any unused Annual Allowance can be carried forward for up to 3 years. A lower limit may apply if you are already taking your benefits from a pension plan/scheme (you will have been notified if this is the case) or your income for the year exceeds £150,000.
For the Affinity Water Pension Plan the value of your benefits you build up in the year is compared against the Annual Allowance. If you contribute to any other scheme a different test may apply for that scheme.
If the growth in your pension exceeds the Annual Allowance tax may apply and it will be up to you to declare this on your self-assessment tax return.
If your pension savings are worth more than £1 million you may need to protect your pension savings from the lifetime allowance tax charge.
What is the lifetime allowance?
The lifetime allowance is the amount of savings you can take from your pension schemes without facing a tax charge.
The lifetime allowance was £1.25 million but reduced to £1 million from 6 April 2016 and increased to £1.03 million from 6 April 2018.
From 6 April 2018 if you take more than £1.03 million from your combined pension savings, you may face a tax charge.
How much is the lifetime allowance tax charge?
The lifetime allowance tax charge is:
- 55% of any amount you take from your pension savings as a lump sum that is over the lifetime allowance and
- 25% of the value of any benefit you take from your pension savings as pension income that is over the lifetime allowance.
Do you know the value of your combined pension funds?
The lifetime allowance applies to the value of your combined UK registered pension schemes and some overseas schemes. Your pension scheme administrator(s) may already send you information that will help you to find out the value of your combined pension savings. If not you should contact your pension scheme administrator(s) for more information.
This information will help you if you need to apply to protect your pension savings from the lifetime allowance tax charge.
Do I need to do anything now?
If you are agreeing salary and pension contribution levels with your employer for next year, increases in contributions to your pension schemes based on higher earnings may mean you exceed the lifetime allowance.
You may need to act to protect yourself from a tax charge even if you are not yet nearing retirement.
If you have existing protection but know that you may lose this you may also need to consider whether to apply for the new protections.
What do I need to do to protect my pension savings?
Since April 2016 you have been able to apply to HMRC for one of two new protections when the lifetime allowance is reduced. These will be known as fixed protection 2016 and individual protection 2016.
You can apply for these protections by using a new on-line self-service system which can be accessed at https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance.
Your pension savings may already be protected
The lifetime allowance was introduced in 2006 and was reduced in 2012 and again in 2014 and 2016 before starting to increase in 2018. It is intended that the Lifetime Allowance will grow each year in line with inflation.
Each time the lifetime allowance reduced, people who had already planned their pension savings on the basis of the higher lifetime allowance could protect their pension savings by applying to HMRC and should have received a notification from HMRC confirming their protection.
However you may still be subject to the lifetime allowance charge if you lose this protection.
You can find more information about how to do this along with other information about the existing protections and when these may be lost at https://www.gov.uk/tax-on-your-private-pension.
Tax and your retirement income
Once you retire, your pension will become your income and Income Tax will be deducted at your normal rate before it is paid to you.
You can also take up to 25% of your Account as a tax-free lump sum once you retire, if your total savings are under the Lifetime Allowance for the year you take your benefit. For the tax year 2018/19 the Lifetime Allowance is £1.03 million.
You can get more information about tax allowances for both the Annual and Lifetime Allowance from HMRC.