Pension Questions Answered: Tax Relief, AVCs, SIPPS and Retirement Planning
Following our Finance on Friday pensions webinar, Money Mentor Verity Brown answers some of the questions asked about pension contributions, tax relief, SIPPs, AVCs and how much you may need in retirement.
Is the additional tax relief claimed through the pension company or your employer?
Neither – it comes directly back to you from HMRC.
Here’s how it works. If your pension uses relief at source, your provider automatically claims 20% basic rate tax relief and adds it to your pot. That bit is handled behind the scenes. But the extra relief that higher and additional rate taxpayers are entitled to – that doesn’t go into the pension. It comes back to you personally.
You claim it through your Self Assessment tax return, or by contacting HMRC directly. HMRC then either sends you a cash rebate or adjusts your tax code so you pay less tax going forward.
So to be clear: your employer doesn’t do anything with this. Your pension provider doesn’t chase it for you. Higher and additional rate taxpayers may need to claim any extra pension tax relief they are entitled to through HMRC. Many people are unaware this may not happen automatically, so it is worth checking how your pension contributions are treated.
Will my employer match my AVCs?
In many cases, employers do not match AVCs, although arrangements vary between employers and pension schemes. It is worth checking what applies to your own scheme before making extra contributions.
Employer matching typically only applies to your standard pension contributions – the regular amount agreed as part of your employment terms, up to whatever percentage they’ve committed to match. AVCs are extra contributions you’re making voluntarily on top of that, and most employers draw the line there.
There’s one possible exception worth mentioning: some employers allow you to make AVCs through salary sacrifice. If that’s available to you, the employer doesn’t match the contribution – but you both save on National Insurance because your salary is technically lower. That’s a benefit, but it’s different from matching.
If you’re unsure what your employer offers, it’s worth asking HR directly. Sometimes there are arrangements that aren’t well publicised.
How do I choose the best SIPP provider and funds?
A SIPP (Self-Invested Personal Pension) is essentially a pension you set up and manage yourself, rather than through an employer. It’s the main option for self-employed people, but employed people can have one too – either instead of or alongside a workplace pension.
Choosing a provider — what to look at:
Charges first. This is the most important thing. Charges are an important factor to consider because even small differences can have a significant impact over time. Every provider charges fees, and they compound over time just like your investments do – except in the wrong direction. Look at two numbers: the annual platform fee (usually a percentage of your pot) and the fund charges (listed as OCF – Ongoing Charges Figure). A difference of even 0.3% per year might sound tiny but over 25 years it’s thousands of pounds.
Popular options and their rough positioning:
- Vanguard — generally associated with lower-cost investing and a relatively focused range of predominantly passive investment options.
- Pensionbee — designed to offer a straightforward user experience and pension consolidation functionality.
- Hargreaves Lansdown — offers access to a wide range of investments and pension options, although charges may be higher than some alternatives depending on the size of the pension and investments selected.
These are examples, not recommendations. The right provider will depend on your circumstances, pension size, investment preferences, charges and whether you need personal advice.
Choosing funds — if you’re not confident:
You don’t need to pick individual company stocks. The simplest approach is a global index tracker – some people choose passive index funds, which aim to track a market or index rather than trying to beat it. Others choose actively managed funds, where a fund manager makes decisions about what to buy and sell. Outcomes vary, and no investment approach is guaranteed. What is suitable for you will depend on your timescale, attitude to risk, investment preferences and wider financial position.
Examples:
- Vanguard LifeStrategy funds — you pick a number (20, 40, 60, 80, 100) which represents the percentage in shares. Higher number = more growth potential, more ups and downs.
- Global index trackers — most platforms have their own version. Look for something that tracks the FTSE All-World or MSCI World index.
If ethical investing matters to you, most platforms now offer ESG (Environmental, Social, Governance) alternatives. The charges are often slightly higher but the gap has narrowed significantly.
The honest summary: Many people choose simple, diversified funds rather than trying to pick individual company shares. What is suitable for you depends on your circumstances, timescale, attitude to risk and whether you want personal advice.
How much do people actually need in retirement? Is there a percentage rule?
Yes to both – there are useful benchmarks, though they’re starting points rather than exact answers.
The PLSA Retirement Living Standards are the most widely used guide in the UK. They were updated in 2024:
For a single person:
- Minimum: around £14,400 a year — covers your needs, a little left over, not much else
- Moderate: around £31,300 a year — more security, a holiday a year, decent quality of life
- Comfortable: around £43,100 a year — regular holidays, a new car every few years, more freedom
For a couple, add roughly 50-60% to those figures rather than doubling them, because you share many costs.
The full new State Pension is currently about £12,547 a year. That means it almost covers the minimum for a single person — but there’s a big gap between that and moderate or comfortable living.
The “two-thirds” rule of thumb:
A commonly used benchmark is that you’ll need roughly two-thirds of your final salary to maintain a similar standard of living in retirement. The logic is that some costs drop away — you’re no longer commuting, no longer paying into a pension, your mortgage may be paid off, your children are grown. So £60,000 a year when working might translate to needing around £40,000 a year in retirement to feel equivalent.
The “25 times” rule:
Another useful one: multiply your desired annual income by 25 to estimate the pot size you’d need. This is based on drawing down roughly 4% of your pot each year — a level at which many financial planners consider the pot sustainable over a long retirement.
So if you want £30,000 a year from your pension (on top of State Pension), you’d need a pot of around £750,000. That sounds huge — and it is — which is exactly why starting early and understanding what you’re on track for matters so much.
This is only a broad planning assumption and should not be treated as a guarantee of sustainable retirement income. How long a pension pot lasts will depend on many things, including investment returns, inflation, tax, charges, life expectancy, withdrawals and your individual circumstances.
Why do you pay tax when you take your pension out? You already paid tax on your salary.
This is one of the most common questions and the confusion is completely understandable – so let’s unpick it.
The key thing to grasp is: you didn’t pay tax on the money going into your pension. That’s the whole point of tax relief.
If your contributions go in via salary sacrifice or net pay, the money comes out of your salary before it’s taxed. HMRC never touches it on the way in. If it goes in via relief at source, you contribute from take-home pay but HMRC refunds the tax — so again, effectively untaxed going in.
So you haven’t been taxed twice. The deal is:
- No tax going in (thanks to tax relief)
- No tax while it grows (no capital gains tax, no income tax on dividends inside the pension)
- Tax when you take it out — because that’s when you’re finally receiving it as income
Think of it like a deferred salary. HMRC is saying: “We’ll let you put this money aside untaxed now. When you take it in retirement, we’ll tax it then — but by that point, most people are in a lower tax bracket than during their working years.”
That’s the real benefit. If you paid 40% tax during your career and you only pay 20% tax in retirement, you’ve come out ahead. Plus, 25% of your pot comes out completely tax-free – that’s your tax-free cash entitlement.
So the system isn’t double taxation – it’s deferred taxation, and for most people it’s very favourably structured.
What’s the difference between salary sacrifice and AVCs?
These two things are often mentioned together but they’re actually answering different questions.
Salary sacrifice is about how your pension contributions are taken. You formally agree to reduce your salary by the contribution amount, and your employer pays that money directly into your pension on your behalf. Because your official salary is lower, you pay less Income Tax and less National Insurance — and so does your employer. It’s the most tax-efficient collection method available.
AVCs (Additional Voluntary Contributions) are about how much you’re contributing — specifically, paying in more than your standard amount. They’re extra, voluntary contributions on top of whatever you’re already putting in. They’re most commonly talked about in the context of DB pensions, where your main benefit is your guaranteed income but you want to build a separate pot alongside it.
The easiest way to keep them straight:
- Salary sacrifice = the method (pre-tax, saves NI, applies to your regular contributions)
- AVCs = extra contributions on top of your normal ones
Here’s where it can overlap: you can make AVCs via salary sacrifice — meaning your extra contributions are also taken before tax and NI. That’s the most efficient way to make AVCs if your employer allows it. But most employers don’t automatically offer this, so it’s worth asking.
The bottom line: if you want to pay in more, you’re making AVCs. How those contributions are collected — whether via salary sacrifice, net pay, or relief at source — is a separate question about tax efficiency.
Is the additional pension contribution done direct with the pension company or through your employer?
If you’re employed and paying into a workplace pension
Your regular contributions go through your employer via payroll. Your employer deducts them from your salary and sends everything to the pension provider. You don’t handle that bit yourself.
If you want to make additional contributions on top, you generally have two options:
Through your employer — if your workplace scheme allows it, you can ask payroll to increase the amount being deducted from your salary. This is the better route if salary sacrifice is available, because you save on National Insurance as well as income tax. You’d contact HR or payroll to set this up.
Directly with the pension provider — most pension providers also allow you to make extra payments straight to them, outside of payroll. You’d log into your pension account and set up a one-off or regular payment from your bank. You still get tax relief, but you don’t get the National Insurance saving because it’s not going through salary sacrifice.
If you’re self-employed or have a SIPP
Everything goes directly to the pension provider. Your employer isn’t in the picture. You set up payments from your bank account, and the provider claims the basic rate tax relief and adds it to your pot automatically.
The practical takeaway
If you’re employed, going through your employer via payroll is usually more tax-efficient, especially if salary sacrifice is on the table. But if that’s not possible or you just want to top up with a one-off payment, going direct to the provider works perfectly well and is straightforward to do.
If you’re not sure which option your scheme allows, a quick call to your pension provider or HR department will tell you.
If you are feeling overwhelmed or confused and would like to book a short call with a Money Mentor to see if financial planning would be supportive to you at this time, then you can here…
The answers above summarise some of the questions discussed during our recent pensions webinar. They are for general information and education only, and should not be treated as personal financial advice. The right pension, provider, investment or tax approach will depend on your individual circumstances, including your income, goals, timescale, attitude to risk and wider financial position. Pension and tax rules can change, so please check current figures before making decisions. If you would like to explore whether personal, regulated advice may be right for you, you can book a 15-minute Discovery Call with Women’s Wealth.
All pension, tax and State Pension figures should be checked against current government guidance before publication.