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Pension planning and advice

Key things to know when planning for your retirement and later life.

 

Pension rules introduced on 6 April 2015 gave pension savers unprecedented access to their funds.

If you're aged 55 and over, you're now able to draw your pension however and whenever you choose - take it all at once, or in stages, or keep it invested.


When should you start saving?

If you're able to put some money aside for your pension, then you should. Indeed, the vast majority of financial commentators do not recommend that you should rely entirely on the State to provide for your retirement. With average life expectancy increasing, the savings you make during your working life need to last much longer than ever before.

The key to achieving a good retirement is to plan as early as possible into your career by making regular contributions to a pension pot and not just put aside a lump sum every time you think you can afford it.

There are a number of pension options available to you:

Most people will get the basic State Pension when they retire. How much you'll get per week and other useful information can be found at gov.uk

Pension rules changed in 2016 and the earnings-related part of the previous system for people who were employed, called the Additional State Pension, was abolished. The new State Pension is based on your National Insurance (NI) record alone. To receive the maximum new State Pension, you require 35 years NI record. 

However, if you have been “contracted out” of the State scheme at any time in your working life the amount you receive under the new State Pension may be reduced. Calculating this is complicated, but you can find out more information on gov.uk/check-state-pension.

Other new rules which may affect you;

If you’re contracted out of the Additional State Pension, your NI contributions increased from April 2016. That’s because the Additional State Pension has ended and so it's no longer possible to be contracted out of it.

You’ll still be able to defer taking your State Pension. For each year you defer, you’ll get just under a 5.8% increase in your State Pension (compared to 10.4% under the current system). You will no longer be able to take the deferred amount as a lump sum.
It’s a good idea to regularly request a State Pension statement so you can see how much State Pension you’ve built up so far. You can apply for one online or by phone or post. You’ll find details about how to do this at gov.uk/check-state-pension

You can find out the date on which you will reach State retirement age with this calculator on gov.uk.
Since 2012, the Government has been rolling out auto-enrolment into workplace pension schemes, to ensure that every employee will be signed up to a retirement savings plan unless they opt out. Workplace schemes save not just your own money but are boosted by a contribution from your employer and tax relief from the Government, all of which help your savings grow.

The scheme is aimed at ensuring people have some sort of provision for when they retire, made up of contributions from both the individual and their employer.

However, just relying on your workplace pension scheme is unlikely to be sufficient. You need to ensure that you are on track to have enough funds to pay for the level of retirement income that you wish to enjoy.

There are two main options to do this. Firstly you can increase your monthly payment contribution. Secondly you can make regular or occasional ‘one off’ payments.

An alternative consideration is to delay when you start taking your pension. For further information see gov.uk.

There are basically two types of pension scheme available to employees in the UK. 

1. Defined benefit or final salary pensions

The first is commonly known as a “defined benefit” or “final salary” scheme and is provided by your employer. The amount you receive each month during your retirement is related to how much you were earning when you ceased employment, which is your final salary. 

Clearly it will also, of course, depend on how long you worked for that employer. Final salary schemes have in recent years largely disappeared from the pensions landscape, almost without exception in the private sector, apart from a few big employers. They remain however in the public sector.

 

2. Defined contribution or money purchase pensions

The second type of scheme is known as “defined contribution” or “money purchase”. With this type of scheme you save up yourself, often with contributions from an employer, to provide a “pot” of money that can be used in your retirement to provide an income. Under regulations, introduced in April 2015, you can also withdraw lump sums.

These are usually either personal or Stakeholder pensions and sometimes called “money purchase” pension schemes. They can be workplace pensions arranged by your employer or private pensions arranged by you. 

Money paid in by you or your employer is put into investments by the pension provider. As with any investment, the value of your pension pot can go up or down depending on how the investments perform.

Some schemes move your money into lower-risk investments as you get close to retirement age.

The amount you’ll get when you take your pension pot depends on:

  • How much was paid in
  • How well the investments have done
  • How you decide to take the money, e.g. as regular payments, a lump sum or smaller sums

If you're 55 and over you'll be able to:

  • Use your pension to buy an annuity – which will provide you with a guaranteed income for life
  • Take the whole lot as a cash lump sum
  • Keep your money invested, and withdraw sums whenever you want.

Whether you take your money in one go or in stages, 25% of your pension fund withdrawn will be tax-free, the rest will be taxed at your marginal tax rate or possibly 0% if your total annual income falls within your personal allowance.

Before the regulations that came into force in April 2016, the majority of people would use the money they had saved to purchase an annuity, also known as an “income for life”. In this scenario your money is handed over to an insurance company, which in return undertakes to pay you a certain level of income for life. 

Since the new regulations people can choose different options if they don’t want an annuity, and instead can choose to “draw down” money from their pot as their income. This provides much more flexibility and the possibility of leaving any money left over to your heirs. 

With an annuity, if you die soon after you take it out, the annuity dies with you, unless you have purchased an “extra”, such as provision for a spouse or a guarantee that payment will be made for a certain number of years.

How does an annuity work?

  • When you take out an annuity you effectively hand over your pension fund to the annuity provider who will be an insurance company.
  • In return it promises to pay you an income for the rest of your life. If you die ‘early’, then what happens depends upon the type of annuity that you have purchased.
  • Some annuities provide a guarantee that in the event of early death, the income will continue to be paid for the balance of the guaranteed period. For example you may apply for a five year guarantee. If you died after two years of annuity payments the annuity would continue to be paid for the next three years. At the end of the annuity guarantee period, death results in no further payments.
  • If you buy an annuity without a guaranteed period, the annuity income stops on your death. You can therefore work out how long you have to live to get back in annuity income the full amount of your fund but the risk is if you die too soon you will not get much value from the policy. 
The self-employed do not have an employer adding money to their pension even though there is generous tax relief on their contributions. For a basic-rate taxpayer, for every £100 you pay into your pension, HM Revenue& Customs (HMRC) add an extra £25 saving into your pension. Therefore whilst saving for a pension if you’re self employed can be a more difficult habit to develop than it is     for those in employment, this is clearly a major incentive.

However preparing for retirement is crucial particularly for sole traders, who could finish up with nothing more than the State pension if they don’t set up some sort of long-term plan during their earning years.

Useful information on pension-saving for the self-employed can be found on The Money Advice Service. There is also NEST, (the National Employment Savings Trust), an organisation set up by the Government for employers who, under the new rules on pensions, must provide a workplace scheme for their employees to join, but don’t want to sign up with the big fund management or insurance companies.

NEST also allows certain individuals and the self-employed to join. More information can be found here.
To maintain the standard of living you had during your working life, it is widely accepted that you would need an income of two-thirds your final salary. This useful pension calculator from the Money Advice Service allows you to work out what you will need to contribute throughout your working life.

If you die before the age of 75, you can now pass on your unused pension as a lump sum to any beneficiary completely free of tax, without it affecting their normal rate of income tax.

If you die after age 75, you can now pass on any unused pension to your beneficiary either as a lump sum or as income taxed at their marginal rate, without it affecting their normal rate of income tax.

You should check whether your current pension plan gives you full access to these new freedoms – not all do.                  


How can the Family Building Society help?

We believe it's important that our customers have access to independent experts to assist them in their financial planning. 

Planning for your pension needs can be complicated and that's why we've partnered with independent experts, Quilter Financial Advisers, who have helped thousands of clients to retire securely.

If you would like their advice, please contact our friendly team: 

Ask us to call back Email us

 

We receive payment from Quilter Financial Advisers where an introduction to their services leads to a transaction taking place.

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