Or, everything you ever wanted to know about pensions… but were afraid to ask.
Pensions are a necessity of life, we all need one and we all know we need to get it sorted, but we’re not sure where to start – or if we’ve started saving already, we’re not sure if what we’ve done is sufficient to secure our twilight years!
We’re here to help take the pain out of pensions with some straightforward, no nonsense advice… so let’s start at the beginning:
Why invest? Advantages of a pension
The bottom line is, if you want to retire and be confident of having enough money to fund the remainder of your life then you need a pension!
With the recent changes in pension legislation, there are three key reasons why you should be looking to contribute to a pension:
● They are still one of the few ways that you can get tax relief from HMRC;
● New rules mean you have much more flexibility over what benefits you take and when; and
● If you don’t use the entire pension in your lifetime, they can pass to your family, usually tax free.
What do I have already?
So, most of us have pensions from previous jobs, but we’re not necessarily sure where they are, how much they are worth and what they’ll do for you in retirement, so our first tip is to find out what you’ve got already.
Pension types explained
Millions of us have a mixture of the three main pension types:
● State pension – The full state pension stands at £155 a week, amounting to just over £8,000 a year. Simplistically (as there can be other factors) to qualify you need 35 years of National Insurance payments, but it is possible to top up missing years and buy extra income. No clearer? Well the good news is that the Government has a website dedicated to helping you find this information out.
● Defined benefit – Many companies used to offer this type of pension scheme and often on a final salary basis, which is based on your length of service and your salary at point of leaving employment. These scheme where attractive, due to the funding arrangements and removal of investment risk, but unfortunately many of these schemes have now closed (certainly to new members). If you’ve lost track of a scheme, the Government provides a free Pension Tracing Service, allowing you to contact anyone holding pension entitlements for you.
● Defined contribution – These are the most common types of pension and are referred to under lots of different names, such as Personal Pension, Group Personal Pension, Self-Invested Personal Pension (SIPP), Auto Enrolled Group Personal Pension and so on. The benefits you get from these schemes depends on how much you contribute and how successfully the money is invested. Many clients can have several of these “pots”, all taken out at different times and with no overall end-game in mind.
Once you’ve worked out what you’ve got, you can total your pots and compare against what you think you’ll need in retirement. Then it’s time to either revisit your pension planning (link to /wealth/pension-planning) or boost your savings!
How do I boost contributions? Am I missing out on tax relief?
Probably the easiest starting point is to look at what your employer offers, since it’s compulsory for all employers to offer a pension scheme to their staff under the auto-enrolment rules. This ultimately means your employer is going to have to contribute 3% of your salary to a scheme and the employee 5%, albeit you can fund it at a higher level if you want (up to certain limits if you want tax relief).
If you are the employer, you may want to consider making contributions to your pension from your company. This potentially allows you to reduce your Corporation Tax bill within your business, move the funds into a tax-free environment and potentially take withdrawals when paying lower rates of tax in retirement.
If you’re self-employed you won’t have access to an auto-enrolment scheme, but that doesn’t stop you contributing to a pension and receiving tax-relief (at your highest marginal rate) and then having many of the advantages mentioned above.
What about the increased flexibility?
Prior to April 2015 when it came to planning your retirement post age 50, pensions were seen as being somewhat restrictive and inflexible. Most people ended up buying an annuity at retirement, which offers a guaranteed income for the remainder of your life, but often the benefits were eroded by inflation and once you died the funds would simply stop paying out, or at least reduce and no possibility of passing any money down to kids / grandkids.
Many people in their 50s, especially those who hadn’t made proper provision for retirement, were put off saving for their retirement, because it could take ages to then extract the real value from their pot,possibly even over 20 years!
However, the Government’s changes now mean you have more choice than ever in how and when you take your pension benefits. So from age 55 onwards, whether you plan to retire fully, reduce the hours you work gradually or decide to keep on working, you now have the flexibility to tailor how you use your pension(s), and with the right advice, use the most tax-efficient options possible to fit in with your particular retirement needs.
Phew, so we’ve covered a lot and there’s still so much more we haven’t talked about – in the next of our series on pensions we’ll look at:
● What happens to my pot on death?
● How does my pot on death interact with the Inheritance Tax rules?
Until next time….