UK state pension: The seven golden rules every saver must know | Personal Finance

Most of us want the security of knowing we won’t need to rely solely on the state, and when we save into a pension, the Government gives us great tax breaks that help us maximise our money. 

Plus, when we save through a workplace pension, our employer has to contribute too. Millions of us have been auto-enrolled into employer pension schemes in recent years. 

Andrew Tully, Technical Director at Canada Life explains: “Pensions continue to be the best way of saving for your retirement. Think of saving into a pension as a way of paying you a wage in retirement. 

“Take advantage of tax breaks, any employer matching contributions and think about how you want to invest the money for the long term.” 

Pensions can seem awfully complicated and the rules have changed a lot in the past five years, but really they are just a tax-efficient way for us to put a bit away for our retirement. Here is how they work:

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This is the big advantage of saving into a pension over, say, using ISAs. As a basic rate taxpayer, every £1 you save into a pension costs you only 80p – the tax man pays the 20p you would have paid in tax. If you are a higher rate taxpayer, it’s an even better deal as every £1 you put in costs you 60p, with 40p from the tax man. That’s because pension contributions come out of your gross salary, before tax is deducted. 


If you have been auto-enrolled into a workplace pension, your employer will be making contributions on your behalf too. Currently, your employer will be paying a minimum of 3 percent of your salary into your pension, alongside your 5 percent. 

When you factor in the tax relief as well, it costs basic rate taxpayers 4 percent of their salary to get 8 percent invested into their pot. Many employers will match any voluntary additional contributions you make, often up to a set percentage of your salary. So it’s well worth taking advantage of this if you can afford to. 

Just be aware that pension advisers say that an 8 percent contribution won’t be enough for a comfortable retirement. We should be aiming to save around 12 to 15 percent of our salary. 

The seven golden rules every saver must know

The seven golden rules every saver must know (Image: Getty Images)

If you have been auto-enrolled into a workplace pension, your employer will be making contributions

If you have been auto-enrolled into a workplace pension, your employer will be making contributions (Image: Getty)THERE ARE LIMITS 

Because of the generous tax breaks, there are limits on how much you can save into a pension every year. You can put away as much as your income into a pension in any given year, or £40,000, whichever is the lower. This is called the Annual Allowance. The rules allow you to carry forward unused amounts from previous years, especially if you are self-employed and your earnings vary. 

There is a limit (called the Lifetime Allowance) on the amount of pension benefits you can save before you incur a tax charge. This is currently £1.055million and increases each year in line with inflation. 


As distinct from a normal will, a pension will allows you to nominate who receives your pension in event of your death. It’s really important to keep this up to date as your personal circumstances change, especially as your pension company has discretion over who receives the money. 

The form is officially called an ‘expression of wish’ or ‘nominated beneficiary’ form and recent research from Canada Life suggests that three out of five of these forms are out of date, where people have got divorced, re-married or spouses have died. Contact your HR department or pension company to ensure that yours is up to date. 

Bequests to grandchildren need careful planning

Bequests to grandchildren need careful planning (Image: Getty Images) THE GOOD BIT 

So you’ve diligently saved hard and have come to the stage where you want to give up the day job and enjoy your retirement. From age 55, you can do whatever you’d like with private or workplace pensions. This doesn’t necessarily mean you should access it then, and you should always have a clear idea about what to do with the money. 

The first 25 percent of your pension can be taken tax-free. After that, any withdrawals are subject to regular income tax. The tax man will combine all of your income to work out the rate of tax you pay. This year you can earn £12,500 before paying income tax, and any state pension you receive is included in the calculation. 

It’s always worth checking online pension tax calculators to work out the tax due on any withdrawals you plan to make. Try 


Lucky you! Pensions can be inherited tax efficiently. If you’ve started drawing down pension funds, any remaining money can be passed to your beneficiaries. 

If you have turned your pot into an annuity, to generate a lifetime income, then it depends on the choices you made at the start of the contract. That’s why it’s important that right from the start you understand the effect of your choices later down the line, ensuring you don’t leave a spouse or dependents struggling financially. 

With annuities you can opt for money to continue to be paid out to, say, your spouse, for a set period of time, or to ensure your family get the initial value of your annuity back less any payments which you have received. Make sure you know and understand all your options – don’t just settle for the first offer you get. 


Canada Life’s Mr Tully says: “Pensions needn’t be complicated, stick to the rules, save as much as you can reasonably afford to from as young an age as you can, invest sensibly, but if in any doubt, it’s always worth seeking out the help of a professional financial adviser who can help steer you on the right path.”