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A pension is a tax-efficient way of saving money for your future. Money that you save during your working life is invested and provides an income in your retirement years, with the funds in most pensions becoming accessible from age 55 (57 from 2028).

There are many different types of pensions. The most common are personal, occupational and state pensions.

Occupational Pensions

Occupational (including workplace) pensions are offered by your employer(s), who also pay into them when you do, usually as a percentage of your salary.

These include Defined Benefit pensions, previously referred to as Final Salary pensions, which were traditionally offered by larger employers (such as the NHS and local authorities).

Personal Pensions

Personal Pensions are those you set up yourself (although some employers set these up for you too), including right here through Lexo.

They include Group Personal Pensions and Self-Invested Personal Pensions (SIPPs), the latter of which give you more options and choices, most of which are not relevant to the intelligent investor, on how to invest your pension fund, whilst ensuring the rules laid down by the HMRC are followed.

State Pensions

The State Pension is funded by National Insurance contributions (or credits) during our working life, and offer an indexed pension from your State Retirement Age.


Here are some of the most frequently asked questions about pensions.

Pensions are retirement savings plans, so they’re usually arranged by adults at some point after they start earning an income. However, any UK resident can invest into a pension, from their day of birth or first day in the country and receive tax relief up to age 75 – imagine the compound growth after contributing for 60 years!

Because of the significant tax advantages, contributions are restricted. The amount you can invest is limited by the annual allowance.

The gross amount you can invest (and achieve income tax relief on) is £3,600, or 100% of your earned income, whichever is greater, up to a limit of £60,000.

The £60,000 is called the Annual Allowance and is the annual limit for pension payments.

For example:

I earn £20,000, how much can I pay into a pension?

This would be £20,000.

You would pay £16,000 and HMRC would pay you tax relief of £4,000 making a gross payment of £20,000. This could be arranged monthly, ad-hoc or annually.

I would like to pay into a pension for my son who is 3 years old, how much can I invest?

Because your son has no income, you can save up to £3,600 per year. You would pay £2,880 and HMRC would pay £720 making a gross payment of £3,600. This could be arranged monthly, ad-hoc or annually.

In the 2023 Spring Budget Jeremy Hunt announced that the lifetime allowance (LTA) is to be abolished. 

The current LTA of £1,073,100 will be abolished from 6 April 2024. In 2023/24, LTA checks still need to be done, but if the allowance is exceeded there won’t be an LTA charge. Effectively, the excess will be charged at 0%.

Individuals who have taxable income for a tax year of greater than £260,0000 (this includes all income, from all sources) will have their annual allowance for that tax year restricted.

The Annual Allowance (currently £60,000 2023/24) will be reduced, so that for every £2 of income they have over £200,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction will be £50,000, so anyone with income of £360,000 or more will have an annual allowance of £10,000 (£60,000 – £50,000).

Adjusted IncomeAnnual Allowance
 £ 260,000.00 £ 60,000.00
 £ 270,000.00 £ 55,000.00
 £ 280,000.00 £ 50,000.00
 £ 290,000.00 £ 45,000.00
 £ 300,000.00 £ 40,000.00
 £ 310,000.00 £ 35,000.00
 £ 320,000.00 £ 30,000.00
 £ 330,000.00 £ 25,000.00
 £ 340,000.00 £ 20,000.00
 £ 350,000.00 £ 15,000.00
 £ 360,000.00 £ 10,000.00

Adjusted income is the definition of income used. It is income from all sources including employer pension contributions.

High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.

This affects members of Occupational Defined Benefit pensions too.

However the tapered reduction doesn’t apply to anyone with ‘threshold income’ of no more than £200,000. Threshold income is income from all sources, but does not include pension payments.

Clearly the definitions of the two incomes are crucial to understanding whether someone is affected by the tapered reduction or not.

Where an individual flexibly accesses their pension savings they are subject to the money purchase annual allowance.

Individuals who have flexibly accessed their pension savings will have a money purchase annual allowance of £10,000 (2023/24).

If you don’t use all of your annual allowance i.e. the £60,000 (£40,000 pre 2023/24) or the reduced/tapered annual allowance for high earners (see above), you may carry this forward for up to three years and use it in the current year to allow greater contributions to be paid.

However you still cannot personally pay in more than you earn.

For example, if you have not fully funded your annual allowance in the previous three years, you can carry forward the unused portion to the current year on the condition that you held a pension during this time.

A pension is a tax deferred savings plan meaning, if your pension fund is below the lifetime allowance, you pay income tax on 75% of the benefits when you access them, 25% is payable tax free.  If your pension exceeds the lifetime allowance (£1,073,100), you can tax £268,275 (25% of the lifetime allowance) tax free and the remainder of the fund is liable to income tax.

The tax free cash is cumulative across all pension funds.

Still not sure about pensions?
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Lexo Personal Pensions

A Lexo personal pension offers a diverse range of investment options, carefully curated to optimise returns while managing risk.