Pensions and retirement

The guides and calculators listed here look at pension scheme types, annuities, tax-free allowances and calculators to estimate pension fund shortfalls and state pension eligibility.

Pension schemes

Pensions are simple in concept but can be complex in practice. It is vital to seek expert advice in order to ensure that correct planning is arranged.

At its most basic a pension is a fund that you build up over your working life in order to provide income for yourself in retirement.

While most people can rely on some level of state pension, the maximum basic state pension for a single person in 2019/20 is £6,723.60 (old state pension rules) or £8,767.20 (new rules). Therefore, most people consider arranging additional pensions an essential part of their financial planning.

Planning
In order to assess your position, we will need to understand your previous history and any existing pension contracts you may have.

In short, we conduct an audit of your present arrangements. We assess the level of pension that your present arrangements might expect to provide at retirement, to establish whether there is a gap between what you want and what you might get.

Pensions: historical complexity (why we need all your information)
Since the 1970s there have been many types of pension and, sometimes, different types of scheme could have been given the same name. For example, there were retirement annuities, which were sometimes called (for marketing purposes) Personal Pension Plans. Then the Government created a new legal structure called Personal Pension Plans. The result was confusion. Add in Group Schemes, Group PPP, Money Purchase Schemes, S32 Buyout Policies, Stakeholder Pensions, SIPPs and more. So, you can see why this is a complex area.

Maximising existing pensions
In the course of a career you might have accrued various pensions with different employers, or through periods of self employment. This is a complex area and we strongly recommend that you supply us with all your pension documents so that we can assess them.

Taking benefits
For most people, taking benefits is a simple matter of calculating the total value available, and then taking some as tax free cash and some as income (normally through drawdown or an annuity).

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.

Pensions - further details

Core principle - people should be given a pensions system that is as easy to understand as possible, and encourages saving, while preventing abuse by the very wealthy.

In some areas (especially corporate and large contribution planning) the rules do not forbid, but simply make unwise, certain courses of action. Expect your financial adviser to sometimes say “Yes you can do XYZ, but .... ” and the “but” will be worth listening to.

All pension schemes must be Registered Pensions Schemes, and contributions are controlled by two allowances:-

  • Annual Allowance - the amount you can invest each year.
  • Lifetime Allowance - the overall fund size limit.

Annual Allowance

The amount of contribution that can be made in any one pension input period (typically a tax year, but can be changed) on which tax relief may be obtained.

For the 2019/20 tax year the annual allowance is £40,000. 

There is a reduction in the £40,000 annual pension allowance where income, including pension contributions exceeds £150,000.

The annual allowance will reduce by £1 for every £2 of income in excess of £150,000, down to a minimum of £10,000.

The allowance is reduced to £4,000 if you have withdrawn more than the 25% lump sum from your defined contribution pension pot.

You can put in more than the annual allowance, but any excess will generally be taxed and will not attract tax relief, so if you wish to do so it is essential that you discuss it with your financial adviser. (This is an example of a “Yes you can, but....” situation).

Most people will be able to invest as much as they can afford, in order to build up a sufficient pension fund for their retirement.

It is also possible to move money from savings to pension, and benefit from tax relief in the process. This might well be worth discussing with your financial adviser, especially in the decade prior to your intended retirement (the aim being to ensure that your post-retirement finances strike the right balance between income and capital).

It is also possible to make contributions on behalf of third parties, (such contributions are treated as having come from the member for purposes of tax relief). This offers scope for people to fund their spouses and dependants' pensions, if they so wish. Discuss this with your financial adviser.

*For pensions provided on a defined benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to assess your position re the annual allowance.

Lifetime Allowance

The maximum tax-free fund allowed* is currently £1,055,000* (2019/20). If you have multiple funds, this is an overall limit.

If your existing funds are above this level (or may grow so) then you need to consult your financial adviser. You may be able to protect your expected rights - contact your adviser urgently.***

*Your fund can build to any size at all, but the excess will be taxed when you take benefits, and the tax is designed to make it generally financially unsound to over-fund your pension.

** For pensions provided on a defined benefit basis, the value of benefits will be translated into a notional fund, which is then used to assess your position re the lifetime allowance.

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.

Registered pension schemes

Schemes to provide pensions are generally registered pension schemes.*

There are four main types of pension scheme, called arrangements:-

Defined benefit arrangements

Benefits are determined by specified criteria, and are not dependent on the amount of any fund. A common type of defined benefits arrangement is a 'final salary' scheme, where the benefits depend on your salary and length of service, although many final salary schemes have closed in the last 15 years.

Money purchase arrangements

Money purchase arrangements are also known as defined contribution schemes. Benefits are entirely dependent upon the funds built up for the member. Most arrangements made by individuals are of this type, as are many company schemes. The following types of pensions are normally money purchase:

  • Personal pensions
  • Stakeholder pensions
  • Retirement annuity contracts
  • SSAS - Small Self Administered Schemes
  • FSAVC - Free-Standing AVC schemes
  • SIPP - Self Invested Personal Pensions

Hybrid arrangements

These occur when a scheme promises some kind of minimal value or benefit, irrespective of actual fund performance.

For example, the terms might be '1/60th for every year of service, or whatever the fund buys, if greater'. If performance was good then the full fund will be used and it will be a money purchase arrangement. If there was poor performance, then the scheme would pay out the 1/60th and be seen to be defined benefit.

Cash balance arrangements

A type of money purchase arrangement where, in the event that the funding fails to provide the required level of benefits, it will be made up to that level.

* In theory there can be other schemes which are not registered, but as these would not benefit from the favourable tax treatment of registered pension schemes their use is expected to be limited, normally only for people whose unusual circumstances prevent them qualifying for a membership of a pension scheme, or who are over their lifetime allowance and need alternative arrangements. Such schemes, however, fall outside the tax regime for pensions.

A pension is a long term investment; the fund may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Self-directed investments

Self-directed investing (SDI) is when an investor chooses not to use the services of an adviser but, instead, researches and makes investment decisions for themselves. Investors of this type are sometimes referred to as 'self-selectors'. When an investor makes their own investment decisions the resulting transactions are referred to as 'execution-only' transactions.

Investors who choose this approach are also responsible for:

  • considering the taxation aspects of their investment choices
  • selecting the various ‘wrappers' to hold their investments in
  • reviewing their investments on a regular basis to ensure that they remain appropriate for their needs and circumstances.

Investors can hold investments directly, such as funds and equities, or can utilise their annual allowances (if they are eligible) to hold these investments within an individual savings account (ISA) or self-invested personal pension (SIPP).

A number of ‘platform providers' offer investment transaction and custody services that can be used by an investor to manage and administer their investments, as well as ‘fund supermarkets' which make accessing a wide range of funds and other investments more straightforward. Most platforms also offer a NISA wrapper and some offer a SIPP, whilst both NISAs and SIPPs are widely available from other types of investment service providers.

Self-directed investing is most appropriate for investors who are confident in making their own investment decisions and in reviewing and managing their own investments on a pro-active basis. 

If you opt for an SDI approach and later find that you need advice, you should contact an investments expert.

The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

Self-invested personal pensions (SIPPs)

A SIPP is a personal pension with added flexibility. It puts you in control as you can decide where you want to invest your assets. 

Investment options include:

  • quoted UK and overseas stocks and shares
  • unlisted shares
  • collective investments (for example OEICs and unit trusts)
  • investment trusts
  • property and land (but not most residential property)
  • insurance bonds.

It can also be used to borrow money, for example, to raise a mortgage to part-fund up to 50% of the purchase of a commercial property.

Who is it for?

SIPPs are ideal for those who are in control of their own investment decisions and are looking to increase their existing range of assets. 

Is SIPP right for you?

A SIPP is popular for investors who:

  • want to control their own pension arrangements
  • would like a wider choice of investments
  • would like to make use of pension drawdown to remain invested post retirement.

This is only a brief outline of the scheme so if you like the idea of a pension that gives you more control and flexibility then we’d be delighted to provide further details to help you make the right choice.

Contact us today to discuss retirement planning.

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. Pension benefits cannot normally be taken until age 55. The value of investments can fall as well as rise and you may not get back the amount you originally invested.

Small self-administered pension schemes (SSAS)

A small self-administered pension scheme (SSAS) is an employer-sponsored workplace pension that can provide retirement benefits for up to 12 people.

A SSAS is run by its trustees, who may often be the members of the scheme.

The scheme is open to the following:

  • company directors
  • employees (you can restrict it to certain workers)
  • family members.

All of the assets of the SSAS are held in the name of the trustees so there are no ‘individual pots’ for each member.

Contributions can be made to the SSAS by the members and/or the employer. Each receives tax relief on contributions, subject to certain conditions. 

Pensions can be drawn from the age of 55.

The benefits

The assets in SSAS can be used in ways that aren’t generally available for many other types of pension. 

Examples include:

  • buying the company’s trading premises and leasing them back to the company
  • lending money to the company
  • purchasing company shares.

The scheme can also borrow money for investment purposes. This could include raising a mortgage to buy the company’s premises. The mortgage repayments may then be covered (totally or in part) by the rental income that the company pays the SASS.

Contact us today to discuss your retirement.

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. Pension benefits cannot normally be taken until age 55. The value of investments can fall as well as rise and you may not get back the amount you originally invested.

Anti-avoidance rules

These rules are very strict for two core aspects, breaches of which can result in severe financial consequences:

  • Unauthorised payments (to members or others).

This should not present any practical issues as the administrators should prevent any incorrect actions.

  • Value Shifting.

Value shifting arises when a transaction occurs that serves to pass value from the scheme to a member or connected person, and in many cases these can be based on arcane or inside information not known to the administrators. The vast majority of irregular plans that are designed to extract value from a pension scheme other than by taking benefits involve value shifting.

For example a scheme might sell a warehouse to the wife of a member, at a fair price for the property as a commercial property, when those involved know that the area is about to be zoned for residential development.

To prevent value shifting all transactions must be conducted at arms length and transactions involving members or connected parties will be subject to particular scrutiny (for example administrators might well seek additional expert opinions regarding the price and terms of the transactions). It is important to note that connected party transactions are not actually forbidden, but simply subject to additional scrutiny.

Legitimate value shifting - when all parties concerned recognise that a proposed transaction will involve value shifting - does not prevent the transaction occurring. However, there will be a charge designed to compensate for the value shifting.

For example, a pension fund may decide to pay a member an above market price for a property. This can be done, provided the charges and penalties are accepted.

In short, if you wish to arrange a transaction of this type, discuss it with your financial adviser first.

Breeches of anti-avoidance rules can be illegal and expensive; we strongly advise against them.

The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future. This information is based on our understanding of current HMRC rules and practice. Tax rules and allowances are not guaranteed and may change in the future.

NEST pensions

NEST (National Employment Savings Trust) is a pension scheme designed to help employers meet their auto-enrolment pension duties.

Employers do not have to use NEST to comply but they do have to automatically enrol eligible employees into a qualifying pension scheme. NEST pensions are run by a non-departmental public body that operates at arm's length from the Government and is accountable to Parliament through the Department for Work and Pensions (DWP).

In order to comply with the new pension reforms, employers will have to:

  • Provide a qualifying pension scheme
  • Automatically enrol eligible employees
  • Pay employer contributions
  • Tell all eligible employees that they have been automatically enrolled and that they have the right to opt out
  • Register with the Pensions Regulator and provide details of their pension scheme and the number of people they have enrolled.

NEST pensions are designed to accommodate these requirements.

Auto-enrolment

The government is trying to encourage people to save for retirement.

To help achieve this, employers are required to set up a pension scheme and automatically enrol eligible workers.

Employers and employees contribute into the pension pot based on the employee's qualifying earnings. The current minimum (2019/20) rates are 5% for employees and 3% for employers. 

Pension schemes have to meet certain conditions in order to comply with auto-enrolment.

Who is eligible?

Workers aged between 22 and their state pension age who earn more than £10,000 a year must be auto-enrolled in a workplace pension.

Other workers who don't meet these criteria may have the option to join a workplace pension scheme.

How are employers affected?

Employers are responsible for making sure they meet their auto-enrolment duties. This includes:

  • identifying eligible workers
  • letting staff know how they will be affected
  • choosing a pension scheme which meets the conditions for auto-enrolment
  • making payments
  • ensuring ongoing compliance such as auto enrolling workers who become eligible
  • completing a re-declaration of compliance every 3 years to The Pensions Regulator.

Changing employer

If you change employer you need to make sure, depending upon the type of scheme, that your pension is protected.

This can be a very complex area, but what you should do is collect the following information, and then seek professional advice.

  • Obtain full details from your old employer as to your accrued benefits and options.
  • Obtain full details from your new employer as to your options.

Pension ages (minimum and maximum)

The minimum age at which pension benefits can be taken is, since 5 April 2010, 55*.

Pension contributions can be made by an adult in their own right from the age of 18, but parents (and other relatives) can contribute to a children's pension (such as a junior stakeholder or junior SIPP) at any time from the birth of the child.

Ill health exception - a pension may be paid at any age and, if life expectancy is declared by medical experts to be less than one year, can be provided as a lump sum.

There is now no maximum age for pensions to commence (whereas prior to 6 April 2011 an annuity could not be taken out after age 75).

* Prior to 5 April 2006 some professions were granted a dispensation to retire early (eg some sports people and dancers). If you fit into such a category and accrued rights under a pension before 2006, it may be possible to protect your rights to retire early. Consult your financial adviser.

The State Pension

The state pension is one potential source of income in retirement. To qualify for a state pension you need to have made national insurance contributions, and the amount that you receive will depend on how many qualifying years of national insurance contributions you have made.

However, there is no right to a state pension - and there is no contract, so a future Government could decide to stop the pension or change the rules (although doing so would be unpopular and, therefore, is highly unlikely).

This makes planning difficult as assumptions have to be made about what sort of state pension there might be when you retire. We think it best practice to assume that the state package (however put together) will probably provide a pension set around the level at which significant social security benefits would kick in.

Our reasoning is as follows – generous pensions are expensive and probably not affordable by the Government, but nor do people like to think of pensioners living in poverty. This means that both very high, and very low, pensions will probably always be politically unacceptable, and will, therefore, not happen.

Taking benefits from an arrangement

Benefits can be taken as lump sums and annuities, or as pension drawdown, athough the exact make-up of the way you choose to take benefits is quite flexible, so most people should be able to arrange them to suit their particular needs.

Pension changes 

Since April 2015, retirees have had greater freedom to choose how they access their pension savings. This includes being able to take lump sums without incurring a 55% tax charge on withdrawals above the 25% tax-free limit. Instead, withdrawals will be taxed at the person's marginal rate of income tax.

This is an area where it is essential that you discuss the options with your financial adviser several years before you expect to retire, or semi-retire. Planning in advance gives maximum flexibility.

Annuities

An annuity is simply an income purchased with capital. The most common use for an annuity is in pensions, but not all annuities are pensions related.

In this context, where the pension is purchased by using the built up fund, the pension is an annuity.*

At its most basic, a pension annuity is simple – you hand over your fund, you get an income until you die.

In detail it is more complex:

Open Market Option

As a pension fund holder your pension provider is obliged to tell you that as well as buying an annuity from the company with whom you have saved your pension, you can take the fund to another company and buy it from them.

It is in your interest to explore this option. It is highly likely that you will be able to get a much better pension by moving the fund.

(It is also worth noting that, to some extent, the annuity rate that a company can offer will depend upon many things outside of its control. Sometimes companies not normally noted for their annuity rates will offer good ones, sometimes those with good rates offer poor ones).

The rest of the options are largely driven by your personal circumstances, and possibly governed by scheme rules for example: -

  • Would you like your income to be fixed, or rise each year (by a fixed percentage, or inflation etc)?
  • Are you in ill health? Do you suffer from a health or medical condition likely to significantly affect your life expectancy? If you do, then it may be possible to apply for an "enhanced" or "impaired life" annuity, which pays a much higher rate of income, to reflect the fact that your early death is likely.
  • If you have a partner, do you want the pension to continue after your death until theirs, and if so, do you want the level to be maintained or reduced?
  • Are you concerned about a sudden early death (for example, in the next five years) and that if this happened, your pension fund would be lost to your beneficiaries? If so, you can opt for a guarantee, or an annuity protection lump sum death benefit, both of which are ways of ensuring that some/all of the used fund goes to your estate's beneficiaries.

Pension reforms

From April 2015 people have greater freedom over how they access their pension pot. If you have any questions about these changes and how they affect your position please contact a financial adviser.

* Not all pensions are annuities. The main exceptions are Defined Benefit Schemes (which do not have to go the annuity route, though may choose to do so) and State Pensions (which are taxpayer funded on a year by year basis).

You can use the government's free and impartial guidance service, Pension Wise, to help you with your pension options. Visit the website at www.pensionwise.gov.uk or call on 0800 138 3944.

Pensions Life Insurance

Most employer schemes will include some element of life insurance (usually called ‘Death in Service’ protection, and paid out at a multiple of an individual’s annual salary).

 

Pension Fund Projector

This calculator simply projects forward a planned single and/or monthly premium, and highlights and estimates any shortfall between the planned provision and the target.

Most people can simply make contributions to bridge the gap as, usually, tax relief is available subject to contribution limits. High earners - £150,000pa+ - may not get full higher and additional rate relief - see your financial adviser if you are in this category.

This calculator ignores all pre-existing pensions, be they personal, corporate or state, unless you decide to actively include them (see the numbered notes).

Charges are as per a representative contact. Your actual charges may be different.

Growth is fixed at 7% gross per annum and inflation is fixed at 2.5% per annum.

(1)
(2)
(3)
eg 0.03 for 3% (4)

*This calculator assumes that the entire fund is used for pension. In practice you might take some as tax-free cash.

(1) If you have existing pensions funds for which you know the current value, you can include these. E.g. existing personal pension of £100pm is worth £10,000 and you are thinking of a single premium of £5,000, put £15,000.

(2) If you have existing pension funds for which you know the current value, you can include these - e.g. existing personal pension of £100pm and you are thinking of an extra £150pm, put £250.

(3) Target income is your ideal pension income in today's terms (although the buying power of this amount will be eroded in the future by the effect of inflation). The calculator ignores state pensions, so bear in mind that these will add to your income.

A basic single person's state pension is worth a maximum of £8,767.20pa for the new single state pension and £6,723.60pa for the old state pension (and can be claimed by both members of a married couple if they, as individuals, have a sufficient National Insurance record).

(4) Annuity rates (how much pension your fund buys) vary with age, health, and long term interest rates. Contact your financial adviser to discuss these in more detail.

Rates are purely for illustration purposes only. Actual rates could be more or less than the rates used.

The value of investments can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.

Full Pensions Audit

This is a complex calculator because it is a complex subject. When using the calculator you will need to make assumptions, please note any assumptions made we cannot be liable for and you should always seek professional advice rather than rely on your own knowledge.

This calculator will help you estimate how close to your pension target you are.

It will only provide a very general picture and we strongly recommend that we conduct a proper audit of your position in which we will assess all of your arrangements. That said, if you enter all the information correctly and it suggests that you need to save £300pm and you are only saving £50pm then it is fair to say that some additional planning will be needed.

*This calculator assumes that you use the whole fund for pension. In reality you may take some of it as tax free cash.

Explanatory Notes

  • Accrual Rate - The rate at which you accumulate pension for each year of service. You need to know this. Guessing is very risky as it may lead to an over-optimistic assessment of your pension position. That said, most good schemes provide one sixtieth of salary for each year of service
  • Expected Years Service by Retirement - This refers to any time that you have spent or will spend in a company Defined Benefits Scheme (one that pays you a pension according to the number of years service, rather than according to the size of any fund that you may accumulate).

    If you have been in such a scheme for ten years, and expect to stay until retirement in twenty more, then enter 30.

    If you have spent five years with such an employer and then left, enter five. However note that this calculator assumes that your salary is the relevant one, whereas in fact presumably your scheme salary was lower. In this case the calculator will OVERESTIMATE your pension.

    If you have benefits from such a scheme and want to see how they affect you, then run the calculator using the term, the salary value that you had when you left the scheme, and the term to retirement that applied when you left the scheme. This will be more accurate, but still not to be relied upon.

  • Value of test Investments - The value of all of your long term savings, be they pension funds, shares, deposits etc. e.g. if £12,000 in pensions, £3,500 in ISAs and £12,000 in deposits/shares etc enter 27500.
  • Savings Rate - How much each year you are setting aside for long term investment, either explicitly to pensions, or implicitly in general savings. If your arrangements seem to be falling short of your desired pension you need to adjust this figure to see how much you need to invest to meet your target. Include any employer pension contributions if known.
  • Inflation and Growth Assumptions - Choose your own, but note that the highest growth rate allowed in formal projections is 9% (for which inflation is assumed to be 4.5%) and the cautious one is 5% (with inflation of 0.5%). As well as the absolute levels of each, it is important to understand that over the long term there cannot be a huge difference between growth and inflation, and differentials of over 4.5% will lead to over-optimistic pension projections.

    Because of the way that the calculator operates there is an added complexity when considering the effect of inflation on regular savings. In short if you invest £1000 a year then, because of inflation, it appears that each year you invest less and less in real terms. If you want to see what happens if you invest the same amount in real terms then set the Inflation at 1, and use a conservative growth rate.

    Enter in the form 1.06 for 6%.

    In the internal calculation the growth rate is reduced by 1% to represent fund charges. Your actual pension costs may be different.

  • Annuity Rate - Choose your own assumption. Enter as a decimal, eg 0.05. Actual annuity rates depend on age, details, and long term interest rates. To find out more, contact your financial adviser.
  • Desired Pension - The annual pension you would like if you were to retire today.

Warning note – the Lifetime and Annual allowances are both ignored in this calculation. The purpose of the audit is to demonstrate complexity and to encourage the seeking of specialist advice.

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