Pensions as a tax efficient investment

With the maximum state pension standing at just £179.60 a week for the tax year 2021/22, it’s a good idea to start putting away additional money for retirement as early as you can.

According to the Money Advice Service, more than half of people in the UK either aren’t saving enough for their retirement or aren’t saving for it at all.

The harsh reality is that for those not saving enough or at all means that in their later years they will either have to save more and retire later, or retire and expect to do far less during retirement because affording a quarterly cruise or a summer home in Spain may not be achievable.

In our previous article, we gave an overview of the other tax efficient investments which you can find here. In this article, we’re going to take a deeper look into the purpose of investing in a pension and how it works.

The advantages of saving into a pension

A pension is basically a long-term savings plan with tax relief. Getting tax relief on pensions means some of your money that would have gone to the government as tax goes into your pension instead.

If you save through a defined contribution pension scheme, your contributions are invested. This is so they grow throughout your working life and then provide you with an income in retirement.

Generally, you can access the money in your pension pot from the age of 55. Furthermore, at this stage, you can only take 25% of your pension pot tax free.

How tax relief can help build up your pension pot

When your income is over a certain level, the government takes tax from your earnings.

You can see this on your payslip. If you put money into a pension scheme, it qualifies for tax relief.

At the time of writing this article, the current annual allowance is £40,000. This is subject to change so please double check in future to ensure you know what the accurate threshold is.

This means that as well as the money you’re putting in, some of your money that would have gone to the government as tax now goes into your pension pot instead.

This is one of the benefits of a pension over a traditional savings account and is why pensions are so important.

Even if you don’t earn enough to pay tax, you may still be able to make contributions up to £2,880 a year with tax relief making them up £3,600.

Key Points:

Pensions offer an effective way to save for retirement as you’ll benefit from tax relief and possibly get employer contributions too

Savings and other investments don’t have these benefits, but you’ll be able to access your money at any time without paying tax

Aiming to hold a pension and some funds in savings and investments may be a sensible strategy, offering the best of both worlds

Employer pension and auto enrolment

If you are employed, then your employer will arrange your pension scheme. Between 2012 and 2018 the government rolled out a scheme that means all employers must offer a workplace pension scheme.

This scheme is called auto-enrolment, where you and your employer both contribute to your pension pot.

You don’t need to remember to pay anything yourself, as the money is deducted straight from your wage packet each month.

You may choose to opt out but if you don’t then this contribution happens automatically.

A workplace pension is a great way to save for your retirement but if you’re self-employed, work abroad, or you don’t meet the minimum earning requirements for your workplace pension, then you might want to consider investing into a pension scheme alone.

Calculate your workplace contribution here


You’re in a defined contribution pension scheme. Each payday:

●    you put in £40

●    your employer puts in £30

●    you get £10 tax relief

A total of £80 goes into your pension.

*According to

Private Pension

If you’re self-employed, unemployed, or otherwise ineligible for a workplace pension, a personal pension still offers attractive tax breaks.

This is also available to you even if you do have a workplace pension. You may choose to have an additional private pension. If you are employed, unless there’s a compelling reason not to pay into your employer’s scheme, you’re probably better off doing that so you don’t miss out on employer contributions.

A personal pension is run by a pension provider, which will claim tax relief at the basic rate and add it to your pension pot.

Self-Invested Personal Pension (SIPP) 

Unlike the above two options, if you want to personally take control of the pension planning by choosing the investments yourself, then a SIPP could be a viable option for you.

Unlike a personal pension, there is no pension provider involved. You get to choose to invest in anything you like.

Naturally the risk here is to make the wise choice! Do you research carefully and make an informed decision before investing.

A SIPP acts like a tax efficient wrapper for all your investments much like a Stock and Shares ISA.

The government automatically adds tax relief at the rate you pay tax for your pension pot.

For instance, if you’re a basic-rate taxpayer paying income tax at a rate of 20%, you could invest £1,000 in your SIPP and the government would add £200, increasing your gross contribution to £1,200.

Key Point:

Investments in your SIPP can grow free from capital gains tax and income tax.

Look out for setup fees and management fees when using SIPPs. Something else to consider is that when you look to drawdown from your SIPP you may incur a charge and annual ongoing charges too.

Retirement Planning

There’s other means to plan for your retirement:

  • Property
  • ISAs
  • Savings
  • Peer to Peer lending
  • Dividend paying shares
  • Venture capital schemes
  •  Inheritance tax planning

To find the most suitable plan for you and your goals, a free no obligation conversation with the A Star team may support your decision making.

We’re here to listen to your goals and objectives and guide you through this process.

Our team is available via email or telephone, and you can find all the information on our website.

Risk Warning!

Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets beyond our control. Investments and the income from them may go down as well as up and you may get back less than the amount invested. Past performance is not a guide to future performance.

A-Star Financial Solutions UK is an appointed representative of New Leaf Distributions Ltd which is authorised and regulated by Financial Conduct Authority: FCA Number 460421