Why You Need a Pension

As you are busy spending on necessities or splurging on the many luxuries that life has to offer, do you spare a moment to think about your twilight years?

Yes, we are talking about retirement when you will no longer have a fixed paycheck every month.

SEE ALSO: When Can I Retire?

The horrific irony is that if you do not plan for retirement, you risk losing the very lifestyle you are so accustomed to.

That designer dress, a faster car, the holiday to an exotic beach location, everything will become unattainable due to lack of income that can sustain it.

To add to this, you have increased life expectancy, rising healthcare costs, caregiving to a loved one or dependent children (if applicable).

This brings us to the question: Do you need to save for a pension or can you and your partner depend on state pension to live life in luxury? Another option would be a Family Income Benefit Policy.

While the state does have a safety net in place to ensure that nobody has to live life in poverty during their retirement years, it cannot be considered enough to sustain a lifestyle that most Britons would consider comfortable.

Here’s a basic figure to help you understand.

Currently, the most you can get from a Basic State Pension payout is £122.30 per week. That means, if you are eligible, you get around £6300 a year.

Is that enough to live a life of luxury? Not even close.

Thinking about Pension Plans

If you still haven’t started, then this is the perfect time to start thinking about Pension Plans.

Apart from being an absolute necessity if you are serious about not being dependant on State Benefits or your children for that matter, then you must start investing in pension plans.

Pensions have numerous advantages too. Here are some of them:

Tax Benefits: Payments made into a Pension fund receive tax relief from the HM Revenue & Customs (HMRC). While ‘tax relief’ may not sound like a compelling reason to start shaving-off a significant amount of your income each month, the effect of tax-free money accumulating over a long period can be immense. The earlier you start contributing, the better because it gives your money more time and potential to increase. Also, the more, the merrier.

Employer Top-Ups: To help people save more money for their retirement, the government has now made it compulsory for employers to register eligible employees into a pension scheme automatically. This is called Automatic Enrollment and is gradually being phased-in starting with the largest employers in the UK. Since your employer will also be making contributions towards your pension (depends on the scheme), opting out of the employer pension scheme is like turning down a pay rise. Unless you have unmanageable debts and can not afford to contribute, you should join your employer pension scheme. Also, some employers make contributions to the pension irrespective of whether the employee does. In this case, you should enrol and take advantage no matter what your financial situation is.

Tax-Free Cash: A quarter of the Pension Pot you build up can be used as a Tax-free Lump sum cash amount. It depends on the rules of the pension scheme and the tax allowances available to you. But let’s say you accumulate £200,000 in your pension pot, you may be eligible to receive £50,000 as tax-free cash. Following the sweeping changes in Pension rules introduced in April 2015, you can also choose how you use the pension if you have a ‘Defined Contribution Pension Plan’. It can be used as a single cash lump-sum or in parts; it can be used as a drawdown plan or as an annuity. If you have multiple pension plans, you can also choose a combination of the above options.

Varied Investment Options: Depending on the type of pension scheme you choose, you can create a diverse portfolio of investments which can grow over your lifetime. Equities, property, funds and bonds, you have multiple options to choose from.

Remember, contributing a part of your monthly income towards your pension may seem like a challenge at the moment, but it has its rewards and benefits. Make small sacrifices today, and it will have a significant difference in the life you lead once you retire.

If you still have questions in mind, you may look at our Complete Pensions FAQ.

How Are Investments Taxed?

You need to pay extra types of tax if you earn money from your investments. Here is a guide on how your investments are taxed and how your tax band can affect what you pay.

Income tax

You will have income tax subtracted from any profits or interest that you make on your investments*, similar to your normal savings accounts.

This means:

  • If you are a taxpayer with a higher rate, you will pay 40% income tax
  • If you are a taxpayer with a basic rate, you will pay 20% income tax
  • If you are a taxpayer with additional rate, you will pay 45% income tax
* Excluding stocks and shares ISA’s.

Capital Gains Tax

If the profit you earn when you sell your investment or shares exceeds £11,300, you will pay Capital Gains Tax (CGT).

The amount of the tax that you pay will depend on:

  • If you are a taxpayer with a basic rate, you will pay 10% CGT
  • If you are a taxpayer with a higher rate, you will pay 20% CGT

You do not need to pay CGT if:

  • The profit you get comes from a stocks and shares ISA
  • You give or trade shares with your spouse or civil partner*
* Unless you are already separated and have not lived together during the same tax year.

Dividend tax

If you receive an income or dividend from shares that you have invested in, you will have to pay for dividend tax.

You have a tax-free dividend allowance of £5,000*.

Any dividends that go over your allowance will have dividend tax subtracted based on the tax band you fall into:

Tax BandDividend tax
Basic rate 7.5%
Higher rate32.5%
Additional rate38.1%
* Dropping to £2,000 from April 2018.

Visit the GOV.UK. for more information on dividend tax

Stamp duty on shares

It is a tax that you pay when you acquire shares. Stamp duty is calculated differently depending on how you buy your shares:

  • Using a stock transfer form: or also known as paper share transfers, you will pay for Stamp Duty
  • Online: or also known as electronic paperless share transactions, you will pay for Stamp Duty Reserve Tax (SDRT)

How does Stamp Duty on shares work?

You are charged 0.5% tax when you purchase more than £1,000 worth of shares and stocks using a paper stock transfer form. The amount you pay is rounded up to the nearest £5.

You can pay for shares using:

  • Cash
  • Other stocks and shares
  • Debt

The amount that you are charged is based on how much and the manner you pay for your share:

For example, if you purchased £5,000 for shares you would pay 0.5% of this sum, meaning the stamp duty would cost you £25.

Once you have acquired your shares, you need to send your stock transfer form to the HMRC for stamping along with your tax payment.

Visit GOV.UK for more details regarding stamp duty

How does Stamp Duty Reserve Tax work?

You pay for a Stamp Duty Reserve Tax (SDRT), which is charged at 0.5% percent and rounded up or down to the nearest penny.

The amount that you are charged is based on what you pay, instead of the exact value of the shares.

If you pay £2,000, for example, for shares that are worth £5,000, you will only need to pay SDRT on the £2,000.

SDRT applies when you buy:

  • Shares in a UK company
  • Shares in a foreign company with a share register in the UK
  • Rights arising from shares already owned
  • An option to buy shares
  • An interest in shares
  • Shares in open-ended investment companies (OEICs)
  • Units in unit trusts

You are not required to pay for SDRT if you are given shares as a gift.

Giving Money to Your Children: FAQs

Helping your children out financially is something that every parent would want to do. However, you need to be careful if you do not want them to receive a large bill from the taxman. Here are some things that you will need to know.

Giving money to your children may seem like an excellent way to assist financially. However, while there is no limit on how much you can give, there are some tax implications to consider.

Give them the cash in the wrong way or at the wrong time and they could end up being chased after by the tax man at a later date.

Here are some things that you need to think about before writing a cheque to your children.

Inheritance tax

Fact: Inheritance tax will see the government get a portion of your estate before it is passed on to your children; it is also implemented to any monetary gifts that you give in the period of 7 years after your death.

The primary concern for most parents giving money is that their children will have to face an inheritance tax bill should they die.

Your estate (the possessions, savings, and property that you leave behind) is assessed when you pass away.

The first £325,000 of anything you own is exempted from inheritance tax (also known as the nil rate band). However, the amount over this is taxed at 40 percent.

As an example, say your estate is assessed at £425,000, the first £325,000 of this would be exempted from inheritance tax. However, £100,000 of its value would be taxed at 40 percent so the tax man would demand £40,000 before the balance is transferred to your next of kin.

However, if you are married, you can transfer your full estate to your spouse if you have passed away without paying any inheritance tax.

By doing this, you also transfer your £325,000 inheritance tax exemption, so £650,000 of your combined estate would remain exempted from inheritance tax on their passing.

Exemptions and allowances

There are a series of additional allowances and exemptions that allow you to gift money without the worry of Inheritance Tax aside from the Inheritance Tax exemption threshold.

Here are the most relevant if you are thinking about giving money to your child.

  • Special Occasions
  • Annual Allowance
  • Selling your house
  • Regular payments

Income tax

Tax break: Gifts are exempted from income tax as they are not considered as a source of income by the HMRC, and therefore you do not need to be concerned regarding income tax when gifting money to your daughter or son.

You may be worried that by gifting money to your children, they will be driven into a higher income tax band, or be subject to pay income tax on the gift itself.

However, this is a common misunderstanding and as long as your child is over 18 is not the case.

Loss of benefits

Something else to consider before you gift money to your children is the effect it might have on their rights to receive benefits.

Although gifts are not considered as a source of income, and therefore cannot put the earnings of your child over the benefit thresholds, some benefits depend on the amount of savings that you have in the bank.

For example, if your child is presently receiving income support and your gift would see their savings rise to over £16,000, they could lose their benefits as a result.

To let your daughter or son avoid losing any income from benefits it is best to sit down and check if the gift you wish to give your children would cause any issues.

Know more information regarding income support here.

How Much Tax On £100 Earned Are You Actually Paying?

There’s an old saying; “There’s nothing certain in life but death and taxes.” Nobody likes paying taxes. Every month when we get our pay slips we look at the deductions column and grumble; what more could we do with our lives if we could keep that 22% of tax money?

Well here’s something else to grumble about: for every £100 you earn you actually pay £64.88. You get to live on just £35.12 when the Government has finished taking its whack.

It’s almost unbelievable? If you added up all the money you pay in taxes for the year you would actually work from New Year’s Day until May 24th – a whopping third of the year – just to pay your taxes. You’re taxed if you do spend money. You’re taxed if you don’t spend money. You’re even taxed in your sleep!

Would you like to know just how many ways can the Government tax you?

When you get paid, the Government takes 22% off you in Income Tax or 40% if you’re a higher rate tax payer. So of your original £100, £78 is left. But it’s still not completely yours. You might put aside £3 for Council Tax, £2 for Road Tax and £3 for the VAT on our utilities bills, which is charged at 5%. You have £70 left out of your original £100. But it still isn’t completely yours. You pay 4% tax on the insurance premiums for your property and possessions – about £4 – taking you down to £66.

Finally, it appears that the £66 is all yours to do as you please with. Er…no. Not yet! Let’s say you decide to go out for the evening. You put £16 worth of petrol in the car and drive to a restaurant, where you spend £15 on a meal. On the way you buy a packet of cigarettes for £7. After your meal, you go to the cinema and pay £8 for tickets for the latest blockbuster. Later on you fancy a drink at your local and you spend £9.

How much in tax has your evening cost you?

The AA reports that a staggering 85% of the cost of petrol is pure tax. Your meal and cinema tickets will have been taxed at 20% VAT, adding another £4.60 to the Government’s purse. Around 35% of the cost of alcohol is tax so your £9 round of drinks has automatically added £3.15 to your growing tax bill.

But what about that £7 packet of cigarettes you just purchased? Those 20 cigarettes are actually worth a minuscule 77p, because the tax you pay on them is an astonishing 88.9%. No real surprise the Government doesn’t really want smokers to quit given they’re such a cash cow for them.

So if you are a standard rate tax payer, so far £64.88 of your £100 has been paid to the government in tax. But it doesn’t end there, because there are all sorts of other lovely little taxes that the government has come up with:

  • National insurance contributions
  • Stamp duty
  • Business/ corporation tax
  • Airport tax
  • Capital gains tax
  • Inheritance tax
  • Savings tax


But there’s one loud voice in favour of taxes that many of us don’t hear – the European Union (EU). The EU ‘loves’ taxes, so much so that it wants to ‘harmonise’ them, which is a shorthand way of saying that they believe the UK, one of the lowest taxed communities in the EU, should be paying as much as them! And do you know out of all the tax you pay £11 goes to the EU, effectively paying an organization that wants to make you pay more income and purchase tax and be poorer? We’ve already had to stomach a 2.5% VAT increase from 17.5% to 20% – what next?

Short-term all this tax makes us grumble and feel annoyed. But it’s long term that it causes the most damage. Paying so much tax on everything will have a detrimental effect on your life and the lives of your children and grandchildren. Instead of spending 40 years of your life building a secure future for your family you end up working to keep the tax coffers healthy instead.

MP’s expenses, bank bailouts and nationalisation of failing businesses thanks to carelessness, over-spending and sometimes plain old cheating, your hard-earned money goes towards covering it all.

You just couldn’t make it up could you?