A well-planned and managed pension arrangement can really make the difference to your lifestyle in retirement. We can let you know what’s available across the whole market, look at your existing arrangements and let you know how they stack-up against what’s available today.
Many people think that their State Pension is all they’ll need in retirement. We think it’s incredibly important that everyone looks to have a personal arrangement whether it be through your employer or with a provider directly. You certainly don’t want to finally reach retirement and then discover you can’t afford to stop work.
There are two kinds of pension scheme. Simply put, a Defined Benefit scheme is where upon retirement you will be provided a guaranteed income for the rest of your life as determined by your employment. Whereas a Defined Contribution scheme is dependent on the monies you contribute to it. Most individual’s in the Private Sector will now be contributing to a Defined Contribution (Money Purchase) scheme. Below we have looked at some of these scheme types as well as the potential options you may have in retirement.
Personal Pensions & Stakeholder Pension
A Personal Pension Plan is the standard ‘tax-wrapper’ used for saving for retirement. Often, they will provide a small range of funds through the provider (often a Life Assurance company) and charge a percentage of the pension value each year. A Stakeholder Pension is very much the same, although it is designed as a limited cost alternative with limited, if any, choice of investments.
Both scheme types will provide you with the expected tax reliefs but usually not much else.
Self Invested Pension Plans (SIPP)
A Self-Invested Personal Pension scheme is a type of Money Purchase/Defined Contribution scheme that provides individuals with the usual tax benefits of a pension arrangement, but coupled with more extensive fund choice, flexibility and control.
A SIPP provides access to a wider range of assets than a Personal or Stakeholder Pension, allowing investments in Shares and Commercial Property, which can be useful for those with more specific investment needs/desires. Furthermore, most new SIPP arrangements will provide access to the full range of retirement income options including assigning monies to Flexi-Access Drawdown, taking a Pension Commencement Lump Sum (25% tax-free cash), retaining an Uncrystallised Funds Pension Lump Sum (UFPLS) and even purchasing a Lifetime Annuity if that’s what you would prefer.
We can look at your existing pension arrangements, find out what they offer and compare that with the other options available in the wider market. If we can find a better arrangement that suits your needs, we can facilitate a transfer of your fund to a new plan that gives you more.
Auto-Enrolment & Occupational Pensions
Many people will rely on their employer for their Pension. In the past, some companies provided Occupational Pension Schemes to their employees which gave individuals a place to save for their retirement and some even received additional contributions to it from their employer.
With the introduction of Auto-Enrolment in October 2012, every company in the UK will need to provide a pension to employees and contribute to it for them by 2019. Furthermore, there is a minimum contribution level that applies to both the Employer and Employee which we have detailed below:
Date Employer Minimum Total Minimum
Present to 05/05/18. 1% 2%
06/04/18 to 05/04/19. 2% 5%
06/04/19 onwards. 3% 8%
If your Employer’s contributions equal or exceed the total minimum contribution, you won’t need to contribute anything, but if they don’t, you’ll need to make up the difference.
There are a whole variety of pensions out there as Pensions stretch over such a long time. The Pension you took out 30 years ago may not be the most suitable option for you anymore. Furthermore, with all the new flexibilities added as recently as 2015, many pensions set up before then won’t have access to the range of options now available.
We think you should always have access to all the suitable options to best utilise your hard-earned pension savings. As such, we will look at all your existing arrangements, their investments, costs and retirement options, and determine whether there are any better options out there for you.
Retirement Income Options
Pensions now have much more flexibility due to reforms in April 2015. Upon retirement, you can choose when and how you take income from it. Primarily, we’ll look to help you determine what best suits your goals, but there are several options for taking an income including:
Pension Commencement Lump Sum
The ability to take up to 25% of your total pension fund as a tax-free lump sum (tax free cash) as early as age 55 could be incredibly useful for paying off the mortgage, setting up your own business or maybe just to go on the holiday of a lifetime.
There are complications though. The actual amount you can receive is dependent on all your pension arrangements; you don’t necessarily get a full 25% from every pension you have, though with some you can get more! We’ll need to look at your contributions history, any withdrawals you’ve taken, any defined benefit schemes you have and the Lifetime Allowance that affects you. Currently the Lifetime Allowance stands at £1,030,000 (as of April 2018) meaning the maximum PCLS you can take tax-free is likely to be £257,500. It could well be different for you though, so you’ll need to get some advice.
Flexi Access Drawdown
Flexi-Access Drawdown is one of the most popular methods of taking an income in retirement. The Drawdown arrangement means that at Retirement you can elect to assign all or part of your Pension monies to a ‘pot’ that you will then draw an income from in retirement.
It allows you much more freedom in withdrawing the monies you have saved up for retirement as there is no limit on the amount you can withdraw, although there is a limit on tax relief provided, you can withdraw monies as and when you require and upon your death your pension pot can be passed to your beneficiaries.
The crucial thing to remember is that whilst you can withdraw what you want, when you want, the monies available are only that which you have contributed plus any investment growth achieved. Income in retirement is not guaranteed in any way and if you were to not save enough, suffer a downturn in your investments or withdraw too much, too quickly, your pension would be depleted and your income would cease.
In the past, pensioners were required to purchase an Annuity at retirement in order to guarantee them an income for the rest of their life. This is a way for pensioners to secure income every year until they die. However, current annuity rates are not attractive and many people don’t want to commit their hard-earned cash on for a modest amount of income, even if it is guaranteed.
Nevertheless, whilst spending a whole pension fund on an annuity may be impractical at the moment, the freedoms in pensions now could allow you to purchase a smaller guaranteed income through an annuity, whilst the rest of your fund looks to top-up that income every year, through Drawdown for example.
Uncrystallised Funds Pension Lump Sum
A final option you may wish to explore is the Uncrystallised Funds Pension Lump Sum or UFPLS. This income strategy requires you to assign pension monies to UFPLS, which in turn means that you can take monies from the fund with 25% tax free and the remainder taxed at your marginal rate. It could be useful if it is the only pension income you are going to receive as you could decide to withdraw the maximum amount covered by your personal allowance for that year plus 25% which is covered by the tax-free allowance, meaning you could receive an income each year completely tax-free.
The considerations for this can be complex though and generally if you are entitled to any other pension income, or require more than the Personal Allowance amount, UFPLS may not be right for you.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.