In its easiest form, a pension is a tax-efficient method to save for your retirement. When the time comes for you to discontinue working, you don't want to be anxious about your finances. Also you need to prepare for it over time. A pension can be a big step towards a more relaxed future by giving you a continuous income.
The money in your pension jar is invested in funds with the aim of raising the value of your pension. The sum you end up with when you come to retire is used to buy an annuity (to provide you with an income for the rest of your life) or you can perhaps take benefits directly from your pension plan with income drawdown. Which is right option for you will depend on a person’s individual circumstances.
Besides the State Pension, though, if you also saved for extra pension advice will be desirable as to what is the best act needed to make your hard earned savings last for life.
Is the Basic State Pension enough for you?
Like the name suggests, the Basic State Pension is doubtful to give you enough income to fulfill your needs at retirement. In the current tax year (2014/2015), the majority you'd get per week is just £113.10 (or £180.90 if you're married).
You might be able to get more with the State Second Pension, which is a top up to the Basic State Pension, but this will depend on your personal circumstances, such as if you're earning over £5,772, caring for a sick or disabled person, or receiving certain other benefits due to illness and disability. You might also be qualified for the Pension Credit if you have a comparatively low income.
Extra Pension Savings
There are schemes which allow you to financially plan with certainty for your future:
- Pre-retirement – Here you might be able to learn what your pot will be worth AND what your minimum income for life will be at any point in the future. You also have the skill to target what future income you want/minimum income you need, and secure it now! This works brilliantly alongside cash flow modelling!
- At retirement – Here you may be able to have a sustainable minimum income for life, at the same time as retaining complete flexibility. This income can be varied at any time, giving you elasticity to become accustomed to any changing circumstances.
You can also be provided with access to invest in a volatility controlled portfolio which over the longer term will continue your fund value, at the same time as insuring you against the risk of poor sequence of returns. These contracts consequently give you the ability to grow your assets, at the same time as retaining peace of mind and access to your money at any time.
Stakeholder Pensions
The lawful requirements for stakeholder pensions are included in the Welfare Reform and Pensions Act 1999 and underlying legislation.To meet the criteria as a stakeholder pension, a pension scheme must gratify a number of minimum conditions:
- it must be a defined contribution arrangement;
- management charges in each year must not amount to more than 1.5% of the total value of the fund (and are taken from the fund) for each year until the 10th year of continuous membership in the scheme when the cap reduces to 1%;
- as well as the 1.5%, the law allows pension providers to recover costs and charges they have to pay for certain other things. For example, when they have to pay any stamp duty or other charges for buying and selling investments for the fund , or for particular circumstances such as the costs of sharing a pension when a couple divorce. These expenses are found in other pension schemes not just stakeholder pensions;
- any extra services and any extra charges not provided for by law must be optional. Extra services must be offered under a separate arrangement with clearly defined costs for the services being offered;
- the scheme must accept transfers in, and there must be no additional charges for this or for transferring to a different stakeholder pension;
- the minimum contribution to a stakeholder pension cannot be set higher than £20 (schemes may set a lower minimum contribution if they wish). Contributions can be paid weekly, monthly (or at other intervals), or they can be a single one-off contribution;
- to look after the interests of their members, schemes must have either trustees or stakeholder managers;
- for trust-based schemes, a third of the trustees must be independent;
- schemes must appoint a scheme auditor or a reporting accountant to check the annual declaration made by the trustees or managers to ensure that the scheme complies with the charging regulations;
- schemes must have a statement of investment principles;
- schemes must have a default investment option which is subject to life styling (this means that during the years leading up to retirement a member's pension is gradually moved into investments that are considered to be less volatile with the aim of providing greater security as they approach retirement).
Pension Transfers
In the past people used to spend a substantial part, or all of their working lives, working for one employer. Today it is more ordinary that people will be employed by several companies over the course of their working life.This means that many people will accumulate a number of preserved pension benefits during their lifetime. These could be in Final Salary and Money Purchase Occupational Schemes or private arrangements such as Personal Stakeholder Pensions and Retirement Annuity Contracts.
It can be time consuming and complicated to get a thorough understanding of what these benefits will be worth when you reach retirement, which is why an analysis of scheme benefits will enable you to have a clearer picture of the future.
It is suitable to weigh up all of the options, as often people have benefits that will never be utilised and could be better off in a substitute type of scheme.
A Pension Transfer analysis will consider:
- Whether benefits are certain
- Probable retirement pension and the way this is revalued
- Tax free cash, and whether this is restricted
- The provision of spouses and dependants benefits
- Death benefits payable both pre and post retirement
- Whether the benefits should be transferred to a more suitable environment.
It is not always a clear cut answer as to whether it is advisable to transfer old scheme benefits, sometimes you have to weigh up the guarantees that may be given up and the connected level of risk. It is also advisable to carry on to review your potted pension benefits as your needs, requirements or circumstances may change.
What we are confident of is that we can guide you to making the right decision in light of your person requirements.
Personal Pensions
You can either make monthly or lump sum payments to a pension provider. They will send you annual statements, telling you how much your fund is worth.The amount you get when you retire depends on how much you paid in, how well the fund’s investments have done and how you make a decision for your retirement income to be paid, e.g. as lump sums or regular payments.
You can take up to 25% of the fund as a tax-free lump sum if you want to.
From next April 2015, savers will be able to access their pension without limits or penalty taxes in three ways, including an option that would leave a pot uncrystallised without entering drawdown or buying an annuity.
HM Revenue and Customs ‘on 6th August 2014, published draft guidance on clauses for the Taxation of Pensions Bill, which will bring into law the changes confirmed by the government last month that will liberate savers’ access to savings.
Options contain placing a fund into drawdown under a new type of fund known as ‘flexi-access drawdown’, from which consumers can withdraw any amount over whatever period they choose. On the other hand savers could provide an income by using their pot, or a portion of it, to purchase a lifetime annuity.
Alongside these familiar options, HMRC unveiled a third option that will allow savers to take lump sums from their pension after the age of 55, without crystallizing the pot.
Under this option the saver would not need to make an immediate decision on their 25 per cent tax-free lump sum, or allocate the remainder to a drawdown vehicle at the same time or to an annuity within six months.
According to consultancy Towers Watson, this could open up planning options for savers for whom deferring the tax-free amount may be beneficial.
Dave Roberts, a consultant at the firm, said: “How it makes sense to take money out of a pension can depend on the individual’s circumstances. If they are still working and don’t expect their future retirement income from other sources to use up their full tax allowance, they might prefer tax-free withdrawals now and taxable withdrawals later.”
Mr. Roberts also said the entitlement for members to transfer their pension from a legacy scheme not offering the new drawdown option to one that facilitates the new ‘Fad’ are likely to be “strengthened through the Pension Schemes Bill... going through parliament this year”.
The above may be changed and is as our understanding in August 2014.