Five essentials of pension planning

13 January 2015

The monumental changes announced during 2014 have got more people talking about pensions, and will increase their tax effectiveness when they are implemented in April.

So it is more important than ever to think about getting your pension arrangements in order.

1. Have you given your pension fund manager the name of the person who'll inherit your fund?

The chancellor has tipped the tax scales in favour of pensions by doing away with the 55% death tax charge. Until the changes (unless you died before age 75 without touching your pension fund, or you passed on your fund as a pension to your partner), 55% of the pension assets in your personal or money purchase pensions went to the taxman. Now, in most cases, your unused pension funds can be inherited free of tax.

But this only applies if you have told your pension company whom to pass your fund to. Otherwise, the remaining money will have to go into your estate and will be subject to inheritance tax. So it is vital that you contact your pension company to nominate a beneficiary.

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2. Have you checked whether you can contribute more into pensions?

For many people, in particular higher-rate taxpayers, pensions are probably the most tax-efficient form of savings, especially if you are near or already over age 55. If you have not yet reached your £1.25 million lifetime limit, and you have not contributed the full £40,000 annual allowance, you can still put more money into pensions.

You can also use up any unused allowance from the past couple of years. As long as your earnings are high enough, you can take advantage of the tax relief and the very favourable inheritance tax benefits. It may even be worth moving other savings into pensions to build up a bigger fund for the future.

3. Have you found all your old pension scheme entitlements?

The government estimates that millions of people may have lost track of old pensions amounting to a staggering £3 billion.

Think back and try to remember any company schemes you belonged to or paid into. Even without your own records, the scheme may be able to find your data, so start checking. It can take time to sort this out, but you might be surprised how much it's worth.

Contact the Pensions Tracing Service at - or phone them on 0845 6002537 (or from outside the UK: +44 (0)191 215 4491). There is more helpful information on

4. Have you considered using 'salary sacrifice' for your pension contributions?

Salary sacrifice is a well-established way of saving tax and national insurance when making pension contributions. If you have a salary sacrifice scheme, you agree to take a lower salary, and the amount you have 'sacrificed' can be paid into a pension fund for you by your employer.

The advantage is that both you and your employer pay lower national insurance contributions, so you save both tax and national insurance straight away – and also have a potentially larger pension later on. Here's an example of how it can work.

You earn £28,000 a year and you ask your employer to reduce your salary by £1,500 in exchange for your employer paying an extra £1,500 into your pension. Your take-home pay, after tax, national insurance and your own pension contributions, falls from £20,452 to £19,492 – a reduction of £960.

However, you have made a £1,500 pension contribution, so you end up £540 a year better off overall, because the value of your total net pay package including the employer pension contribution has increased from £20,452 (without salary sacrifice) to £20,992. The extra £540 comes to you from the tax and national insurance savings.

If you don't already have a salary sacrifice scheme at work, it's worth asking your employer about it, because the company can save money on national insurance too. In most cases, it's the sensible thing for you to do, although it could impact your life insurance cover and mortgage eligibility, so make sure you get advice if you're not sure what's best.

5. Have you thought about pensions for your children or grandchildren?

Did you know that you can put money into pensions even if you do not pay any tax, or invest on behalf of someone who is a non-taxpayer – and still get tax relief. Anyone can put up to £2,880 into a pension fund every year and receive 20% tax relief from HM Revenue & Customs, taking the total going into their pension fund up to £3,600.

Whether it is for your children, your grandchildren or a partner who isn't earning at the moment, there could be good reasons to pay into a pension on their behalf.

This feature was written for our sister publication Money Observer

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