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Pension for Life: An Achievable Dream

Contributed by Egnut.com
24 January, 2018

When most people hear or think about retirement, they instantly imagine a life of bliss, dream vacations and crazy adventures after their active working years - completely free from worries and stress. But is this paradisiacal imagination the reality after retirement? It's possible, but commitment is key.

While these are exciting images in the mind's eye, the old maxim, 'As you make your bed, so you must lie in it,' still holds true especially for retirement.

With the change of pension from a benefit plan to a contribution plan, getting to their hoped retirement 'heaven' is not so much a straight visa for many senior citizens.  

In the good old days when pension was a benefit plan, employers were obligated to make the commitment to funding a fixed, monthly retirement payment to employees. They therefore mostly shoulder the risk of funding the investment pool, leaving the worker less to worry about.

However, with the introduction of a contribution plan (such as the 401ks and the likes), as a worker, you now have to be actively involved in the pension account, which of course comes with the freedom to use your retirement fund however you desire it. It means when the funds are up, you are done.

Besides, you also get taxed 25% of the whole lump. An instance will be, if you earn £10,000 annually, only £2500 will be tax-free, leaving you to pay tax on the rest £7500. Your total annual income and your tax rate become the determining factor of the amount of tax you pay.

Your Tax-Free Amount

You can take your 25% tax-free amount basically in two ways:

1. All at once

It is completely up to you if you want to take your 25% tax-free amount all at once. However, there is a catch; you cannot leave the remaining 75% untouched. You will have to do one of the following:

  • Take everything as cash (but remember that you will be taxed on all).

  • Purchase guaranteed income/annuity.

  • Acquire a flexible income (flexi-access drawdown)


Your annual income is £100,000 and you take your tax-free 25% at once which will be £25,000, then you purchase an annuity with the leftover £75,000 that pays you £3500 annually. Always bear in mind that this income is taxable.

2. In Bits

You can choose to take your 25% tax-free amount in bits. However, you will be taxed 25% per bit.


Your annual income is £100,000 and you take £10000. Please bear in mind that £2500 will be tax-free and you will be taxed for the £7500 balance.

How Does Your Tax Get Paid? All your pension payment comes from your provider who has already taken off the tax, including your state pension tax.

If You're Still Working...

Any tax you owe will be taken from your state Pension and earnings. This is known as Pay As You Earn (PAYE).

If self-employed or you earn £100,000 or more, you are required to fill in a Self-Assessment tax return.

Other Incomes

You will have to take the responsibility to pay tax off other forms of earnings (e.g. Investments etc.)

It is important to note that you are expected to pay tax if your pension pot income exceeds the lifetime allowance which is currently £1 million.

Many big employers have turned down the responsibility of a benefit plan because they do not want to be saddled with the responsibility of fending you for life. An article on tax when you get a pension by the United Kingdom Government aptly states that "You may have to pay income tax at a higher rate if you take a large amount from a private pension. You may also owe extra tax at the end of the tax year."

State Pension

This is the pension you are entitled to after working for the government. The forced age of retirement was 65 and this has been done away with. You are only entitled to state pension when you meet up with the State Pension age. Please note that your state pension doesn't get to you automatically. You will have to claim it.

With all of these points, the dream of a fanciful retirement appears to become even more farfetched. What if I tell you that you can have all these dreams restored? Ah, yes! What if I tell you that no matter how old you are, whether 50 or 65, you can still have a pension for life? I know it sounds too good to be true, however, it is possible to have your pension for life and I'll show you how.

Employers take responsibility of depositing annually into the pension plan so that when you retire, a satisfactory monthly balance will be at your disposal from your monthly pension payment.

But since there are no laws enforcing firms to make these deposits, most firms' existing pension plans are underfunded. In other words, the estimated funds available cannot serve the lifespan of the employee. In instances like this, companies shut down the plan after making necessary deposit amount so as not to incur further responsibility.

What Happens If I Change Job Before Retirement?

To be owed any retirement benefit, you have to be vested in the retirement plan of your current employer. An ideal plan usually demands about 5 years of work.

In the case where you have been vested and change job before retirement age, the company will not make contributions on your behalf anymore and your funds will freeze until you hit retirement age.

This alone will reduce the amount you will have because funds have stopped coming into your pension pot a while ago.

Pension for Life

To understand how to can get low tax and keep your contribution plan pension going for life, you really need to understand the difference between a benefit plan and a contribution plan.

In a benefit plan, your employer takes the responsibility and risk of investing your pension funds to getting you paid. However, the contribution plan leaves this risk to you. The solution, therefore, will be to get large investment companies to help invest your pension funds to enable you get an annual annuity for life. They can take care of the investment portfolio while you can get a healthy and regular return on investment (ROI).

Some retirees even decide to spread their investment portfolio further by learning the secrets of successful Forex and investing in it.

Generally, it is important that you're money-smart. For example, you can consider setting up a small business or consultancy in your area of interest and experience, so you can earn additional income and shore up your financial portfolio. In addition to your seed fund from your retirement benefits and other sources, you can also try to access commercial loans to boost your growing business.

Retirement should mean new experiences and fulfillment, plus a happiness "bonus" of simply knowing you're retired from an active work life. And you should make the most of it.


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