3 key pension facts you need to know to help you plan for retirement

When life is busy, pensions can often be left to tick along in the background. Not only can they be complex – especially if you’ve built up multiple pots with different employers over the years – but there’s a general lack of education surrounding pensions that can make them feel even more daunting.

But by engaging with your pension throughout your working life, you can plan and save for the retirement you want by taking advantage of opportunities to grow your pot further.

15 September marks the start of Pension Awareness Week, a campaign aimed at getting people more engaged with their retirement savings. So, in line with that mission, discover three key pension facts to help you get a handle on your fund and start working towards your ideal retirement lifestyle.

Read on to learn more about how tax relief, the Annual Allowance, and compounding all work.

1. High earners can claim additional tax relief on pension contributions

To incentivise savers to pay into a pension fund, the government offers Income Tax relief on pension contributions.

In general, this is automatically applied to all contributions at the basic rate. So, when you pay into your pension, the government will top up your contribution with an additional 20%.

In effect, this means a £100 pension contribution technically “costs” you £80.

There are two main ways these bonus payments can be made:

• Net pay: If your pension contributions are taken directly from your salary, these payments will be made before Income Tax is calculated. So, you receive the 20% bonus through lower monthly tax deductions.
• Relief at source: If you’re making personal contributions or your workplace pension isn’t set up as described above, your pension provider will claim the additional 20% from the government.

Crucially, if you’re a high earner paying Income Tax above the basic rate, you may be able to claim additional tax relief:

• Higher-rate taxpayers can claim a further 20%, totalling 40% in tax relief. That means the £100 contribution described above only costs £60.
• Additional-rate taxpayers can claim a further 25%, totalling 45% in tax relief. This takes the cost of a £100 contribution to £55.

So, tax relief is usually paid automatically at the basic rate, and you’ll benefit by default regardless of your income, or if you make contributions through a net payment scheme.

However, if you’re eligible for higher- or additional-rate tax relief on contributions that are not made via a net pay scheme, you’ll need to claim it separately, usually through a self-assessment tax return. As a result, many high earners are missing out on significant bonus payments from the government, often because they’re simply not aware they’re eligible for additional tax relief.

According to PensionBee, in the four tax years prior to 2020/21, high earners lost out on a staggering £1.3 billion in unclaimed pension tax relief. Considering some people could miss out on these payments over several years – or even decades – failing to claim this tax relief could have a huge impact on the amount of money available to them at retirement.

If you’re a high earner who hasn’t claimed the additional bonus payments from the government, you may be able to recover some of your lost tax relief by backdating your claims for up to four years. A financial planner can help you submit your claim, so you can start boosting your pension pot.

2. You can only claim tax relief on contributions made up to your Annual Allowance

Tax relief is only applied to contributions up to your Annual Allowance, which is applied across all your private pensions. All contributions made by yourself, your employer, or anyone else count towards the limit, as well as any increases in a defined benefit scheme.

If you exceed your Annual Allowance, either you or your pension provider will need to pay tax on the additional value.

In the 2025/26 tax year, the standard Annual Allowance is £60,000, but you may be able to carry forward unused Annual Allowance from as far back as the previous three tax years, potentially increasing the amount you can tax-efficiently contribute in a single tax year. However, you cannot usually tax-efficiently contribute more than 100% of your earnings in a single tax year.

It’s also worth noting that, in some cases, your Annual Allowance might be as low as £10,000 a year if your earnings exceed certain limits, or if you have flexibly accessed your pension.

High earners

If your “threshold income” is over £200,000 a year, and your “adjusted income” exceeds £260,000 a year, the Tapered Annual Allowance will usually apply. Your threshold income includes all your income, but excludes the amount you contribute to your pension. Your adjusted income also includes all your income, as well as your employer’s contributions to your pension.

For every £2 that your adjusted income exceeds £260,000, your allowance reduces by £1, down to a minimum of £10,000. So, if your adjusted income is £360,000 or more, your Annual Allowance will be reduced to £10,000.

Accurately calculating your allowance can be complex, but it’s important to get it right so you know exactly how much you can tax-efficiently contribute to your fund. A financial planner can help you with the calculations.

Flexible pension withdrawals

If you flexibly withdraw money from your pension, you might trigger the Money Purchase Annual Allowance (MPAA). This usually happens when you start drawing your pension as lump sums or income, excluding your tax-free lump sum.

If you trigger the MPAA, your Annual Allowance will immediately reduce to £10,000. Once triggered, it can’t be reversed, and so has the potential to hugely impact your retirement savings if you’re still contributing to your pension.

So, if you’re planning on accessing your pension, it’s worth checking whether you’ll trigger the MPAA first. Otherwise, you might see your tax-efficient contributions restricted.

3. Your pension pot grows more when you pay in earlier

To help your pot grow over time, the money you pay into your pension will be invested across a range of assets.

This could be multiple different asset classes, but will often include bonds, stocks and shares, and funds, among others.

Because your pension funds are invested, it can be beneficial to start paying into your pension sooner, rather than later. When your money grows through investment, the returns themselves are then invested and accumulate more returns. This is known as “compounding”.

Since you could be paying into your pension for decades, compounding could help significantly grow your fund. In one example, Penfold demonstrated that someone who started paying £50 a month into their pension at age 30, and stopped at age 60, would make contributions of £18,000 and end up with a pot worth £41,000 – more than double what they paid in.

But if they’d started paying in £50 a month at age 18, and stopped after just 12 years, their pot would be worth £44,000 by age 60 – six times the £7,200 they’d paid in.

So, by getting started on saving for retirement sooner, you could give your money more time to grow and significantly boost your pension pot.

Get in touch

Knowing how much to pay into your pension and how to best manage your funds can be complex. At Caliber Financial Management, we can help create a plan to maximise your savings opportunities so you can achieve your retirement goals.

Email contact@caliberfm.co.uk or call 01525 375286 to speak to one of our team today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.