Pensions are, of course, designed to enable you to save sufficient money during your working life
to provide an income stream for you to live comfortably after you have retired.
There are many different ‘tools’ used to save for retirement and the taxation and investment elements of pensions can appear baffling. We specialise in explaining, recommending and monitoring pensions for you. Below are the most common sources of pension income to
provide for your retirement.
Single Tier State Pension
The new State Pension is a regular payment from the government that you can claim if you have reached State Pension Age (SPA) on or after 6 April 2016. Other arrangements applied prior to
that date.
You’ll be able to get the new State Pension if you are eligible and:
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a man born on or after 6 April 1951
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a woman born on or after 6 April 1953
If you reached State Pension age before 6 April 2016, you’d get the State Pension under the
Basic State Pension and Additional State benefits headers as shown below.
The full new State Pension is £203.85 per week (2023/24). Your National Insurance record
is used to calculate your new State Pension. You’ll usually need 10 qualifying years to get any
new State Pension, 35 qualifying years for the full amount.
The amount you get can be higher or lower depending on your National Insurance record.
The Basic State Pension for those whose state pension ages falls before 6th April 2016 –
for people who have paid sufficient National Insurance contributions while at work or have
been credited with enough contributions.**
Additional State Pension (as above) – referred to as the State Second Pension (S2P) but before
6 April 2002, it was known as the State Earnings Related Pension Scheme (SERPS). From 6 April 2002, S2P was reformed to provide a more generous additional State Pension for low and moderate earners, carers and people with a long term illness or disability and is based upon earnings on which standard rate Class 1 National Insurance contributions are paid or treated as having been paid. Additional State Pension is not available in respect of self employed income.
From April 2016 both the basic state pension and additional state pension were combined to
offer a simple single tier flat rate pension.**
An Occupational Pension (through an employer’s pension scheme) – This could be a Final Salary Scheme (sometimes referred to as Defined Benefit) or a Money Purchase scheme (usually referred to as Defined Contribution). Pensions deriving from Final Salary schemes are usually based on your years of service and final salary multiplied by an accrual rate, commonly 60ths. The benefits from a Money Purchase scheme are based on the amount of contributions paid in and how well the investments in the scheme perform.
Personal Pensions Schemes (including Stakeholder schemes) – these are also Money Purchase schemes and are open to everyone and especially useful if you are self-employed, just for topping up existing arrangements. From October 2012, the government introduced reforms and all employers now have to offer their employees, who meet certain criteria, automatic enrolment into a workplace pension. Employers can use the government backed scheme, National Employment Savings Trust (NEST), or offer an alternative ‘Qualifying’ work place pension scheme such as a Group Personal Pension, providing it ‘ticks’ certain boxes. The process was phased in between 2012 and 2018 depending on the head count of a firm. Employers are required to contribute a minimum of 3% of salary with Employees making a personal contribution of 5% with tax relief of 1% added on top, which again, was being phased in gradually in April 2019.
Retirement Options – there are now a vast array of different products that may be used at retirement to provide benefits, from the traditional form of annuity that provides a regular
income stream to Flexi-access Drawdown which enables lump sums of benefits to be taken
either as a one off payment or over a given number of years. Given the complexity and choice
all individuals now have, it is important to seek independent financial advice before making
any decisions.
State Pensions may not produce the same level of income that you will have been accustomed
to whilst working. It’s important to start thinking early about how best to build up an additional retirement fund. You’re never too young to start a pension – the longer you delay, the more you
will have to pay in to build up a decent fund in later life.
** For those who have reached state pension age on or after 6th April 2016, these no longer apply.
Your Options at Retirement
Your Retirement Options
From age 55, there are a number of options available to you including:
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Draw your benefits available from the existing provider.
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Purchase an annuity with a different provider on the open market. This could potentially increase the payments to you.
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Transfer to Flexi-access Drawdown (or a Third Way Plan)
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Use the Uncrystallised Fund Pension Lump Sum (UFPLS) rules
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Transfer to phased retirement
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Transfer the full amount to any/a combination of the above
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Undertake a partial transfer to any/a combination of the above
Draw your benefits from your current scheme
Pension arrangements can usually provide an immediate Tax Free Cash (TFC) sum of
25% with the remaining fund generating an income which is subject to income tax.
Some schemes/providers also allow partial transfers to facilitate added flexibility.
Purchase an annuity with a different provider on the open market
Often taking the funds from the existing provider and shopping around on the open market
can considerably increase the level of your income. This is because some providers offer
better rates than others.
Buying an annuity means using your built-up pension fund to buy the guarantee of an income
for life from a company. Before you buy your annuity with another provider, you will still have
the option to receive the TFC from the original pension scheme but the remaining fund value is passed to the new provider to secure your guaranteed income. The value of your pension income in these circumstances depends on several factors such as your age, current interest rates, the value of your pension fund and the type of pension you choose. Enhanced annuity terms may be available if, for example, you have a life-impairing medical condition.
Flexi-access Drawdown (FAD)
Under the option of FAD you can choose to immediately take 25% tax free cash from your plan. Instead of buying an annuity with the remainder of the fund, the money remains invested and
can continue to benefit from investment performance in a tax-efficient environment. There will
be no limit on the income taken which is taxed at marginal rate.
After you have taken your entitlement to the tax free lump sum at outset, you can choose to take as much or as little of the remaining pot as you wish and it will be added to any other income
you have in that tax year to determine the income tax rate that will apply. Please note that if you draw any income from this plan, any future money purchase pension contributions is limited to
a £10,000 (2023/24) maximum Annual Allowance, and these will be no ability to make use of
any carry forward. (i.e. topping up any unused annual allowance in future.)
As the rest of your pension fund remains invested in a tax-efficient environment, your final
pension – and the income you may withdraw each year – will be determined by the continued investment management of your funds. Careful attention, therefore, needs to be given to investment management whilst in Flexi-access Drawdown to try to ensure that your income
can continue for as long as possible and, if you do finally buy an annuity, you would be in
a similar situation to that if you had bought an annuity at the start.
You are able to vary your income each year and the level of income you choose to take will
have an effect on the value of your invested fund which will influence both future levels of
income as well as the amount of any annuity income you may choose to buy.
Whilst in the short term many clients wish to consider drawing large amounts of income
from their funds, in the medium to long term it is important that you balance your income requirements with the investment policy to ensure the annuity purchasing power of your
pension fund is maintained.
With this type of contract (together with the UFPLS option shown below):
(1) The capital value of the fund may be eroded;
(2) The investment returns may be less than those shown in the illustrations;
(3) Annuity or scheme pension rates may be at a worse level in the future;
(4) When large amounts of income are taken or the maximum short-term annuity is purchased, high levels of income may not be sustainable;
(5) Be aware that some state benefits are means tested by the DWP.
Draw your benefits as an UFPLS payment from your current scheme
Your current pension arrangement could provide you with multiple or a one off lump sum.
25% of this would be tax free, the remaining pot initially taxed at emergency rate then falling
to marginal rate in the future. There is no limit on the size of the lump sum you choose to draw. Please note that this type of payment will limit any future money purchase pension
contributions to a £10,000 maximum Annual Allowance.
Phased Retirement
This option allows you to retire gradually. It can make the most tax-efficient use of your
pension fund and it also allows you to build up the value of your pension when it suits you.
Generally, your pension fund is split up into 1,000 equal segments, and these segments can
be phased in over a number of years. Every time you phase in some segments, you can choose
to receive a TFC sum of up to 25% of the value of these segments, and the remainder of the
fund will be used to buy you an annuity. The pension bought will be guaranteed to be paid
to you for life, and you can choose one that increases in value each year and whether payments should continue for your spouse if you die first. The remaining segments will continue to be invested in a tax-efficient environment, thus providing you with the possibility of higher
future income.
A Combination Plan
A Phased Flexi-access Drawdown / Combination plan consists of two distinct parts. Firstly,
the funds are transferred into the plan. The plan is split into a large number of identical
“mini-plans”, benefits from which can be taken at different times. This provides a large
degree of control over the amount and timing of the income to be taken.
Income is released by “opening” sufficient numbers of these mini-plans to produce the required level of income. This is achieved by transferring the funds to the FAD element of the plan.
When each mini-plan is opened, 25% of its fund value is released as tax-free cash. The residual fund from each mini-plan then remains invested in real assets and an income is drawn directly from this remaining fund. The income that is drawn from the FAD funds can be varied.
Each income payment that you actually receive is therefore made up of part tax-free cash
and part (taxable) income from the FAD element of the plan.
Important Note:
HMRC has advised that, where an individual flexibly accesses their pension benefits and
takes an income stream, they then have a duty to tell the scheme administrators of any ‘live’ (where contributions are still being made) or future pension schemes they join in the future,
that they have done so. This is your own personal responsibility. This is because the money
purchase Annual Allowance falls to £10,000 where an UFPLS payment is made and scheme administrators have a duty to inform HMRC if they think someone has paid pension
contributions which exceed this limit.
You should note that, if you do not inform other scheme administrators that you have drawn income from your FAD within 91 days, you will be liable for a penalty of up to £300. Where information is not provided after the initial penalty, a further penalty of up to £60 per day
may be applied until the information is provided. If incorrect information has been provided
a penalty of up to £3,000 may be due where that incorrect information has been negligently
or fraudulently provided.
Advanced Pensions
In recent years the pensions industry has become more advanced in terms of the flexibility
of investments available and the structure of the actual pension arrangements.
It is an area of constant change and you should consult us/me regularly to make preparations
for a secure and enjoyable retirement.
There are many types of Pension structures including Occupational Final Salary (sometimes known as Defined Benefit schemes), Money Purchase Schemes (sometimes known as Defined Contribution schemes), Self-Invested Personal Pensions and Stakeholder Pensions. Some have more complexities and regulatory requirements than others and you may have acquired
a number of different plans over your working life.
We can refer you to a pension transfer specialist, who can give you advice on the best course
of action for your specific circumstances, for example:
You may be going through or have recently divorced and need to know how this will affect
your pension provisions. We can work closely with you and your legal advisers to achieve the
right outcome for you.
You may be thinking of using your deferred pension to fund new commercial or business
premises but also need to raise some additional funds.
You may have significant health problems and you find that your current scheme is inflexible
and restricted by its scheme rules on how and to whom your pension fund can be paid on death.
This list is not by any means exhaustive however, The Pensions Freedoms of 2015 have seen a massive upsurge in people wanting to move their guaranteed or safeguarded benefits away
from defined benefit or final salary schemes. We urge caution and in the first instance would
take the view that this may not be in your best interests and it is not a case of simply following
the crowd. That is why it is important that you get quality Independent specialist advice first.
We can refer you to a pension transfer specialist to help you understand the pros and cons
of such a move and help you to make a more informed decision about what is best for you.
Self Invested Personal Pensions (SIPPs)
A Self Invested Personal Pension (SIPP) is a tax-efficient wrapper within which a wide range
of investments can be held. A new SIPP must appoint a scheme administrator, usually the recognised product provider. SIPPs have the same tax benefits and regulations as conventional personal pension plans but you and / or your advisers have control over the investment choice – each SIPP is unique to the individual. Otherwise, it operates in the same way as a conventional personal pension in respect of contributions and eligibility, for Her Majesty’s Revenue & Customs (HMRC) purposes.
The complex nature of a SIPP means that it is not suitable for all investors. Often, the benefits of ‘self investment’ are only advantageous to people with very large funds and / or investors with some level of sophistication when it comes to investment decisions. Often, there are additional charges for arranging and dealing within a SIPP and these charges would erode smaller funds quickly.
The benefits of using a SIPP include being able to invest in:
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Stocks and shares listed or dealt on an HMRC recognised stock exchange, including AIM
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Stock exchanges that are not recognised by HMRC, e.g. OFEX.
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Unit trusts, open ended investment companies (OEICs)
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Warrants, covered warrants
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Government stock and fixed interest stock
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Unquoted shares
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Commercial property & land
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Property funds
We will be able to provide more details and make a recommendation based on your own circumstances.
Personal and Stakeholder Pensions
Personal Pensions represent a popular and attractive way of saving for your retirement.
All monies invested into your fund grow free of capital gains tax, and the contributions you
make are enhanced by income tax relief at source. For example, if you invest £80, the government adds on tax relief (currently 20%) to enhance your contribution to £100! If you are a higher rate taxpayer you can claim additional relief through your PAYE coding. An annual allowance of up
to £60,000 (2023/24) is available as well as the possibility of utilising potential carry forward
of unused annual allowances.
A personal pension is an arrangement made in your name over which you have personal control. You can alter your contributions, suspend them, or stop them completely. You will be eligible to take 25% of your accumulated fund tax-free when you retire, the earliest age being from 55.
There are a range of options when you decide to take benefits such as purchasing annuity
or electing capped or flexible drawdown.
Personal Pensions usually offer a range of investment mediums to suit your attitude to investment risk, and you can change your investment at any time.
Stakeholder pensions are similar to personal pensions but have their charges capped at 1.5% for the first 10 years, reducing to 1% thereafter. Whilst Stakeholder plans are generally considered
a little cheaper than Personal Pensions, investment choices may be restricted.
Workplace Pensions (Auto Enrolment)
All companies offer a pension scheme to their employees. There are numerous different types available and usually the company will put some money into your pension if you decide to join.
It is important that you take into account your existing pension provision or that from your previous employer before making any decisions.
We will be able to explain the features of your company’s arrangements, and may be able to
assist you to select the right investment funds for your own needs.
Auto Enrolment
People are living longer lives. This means people can enjoy more time in retirement and need
to plan and save for their later years. The government estimates that around seven million
people are not saving enough to meet their retirement aspirations and has put changes
in place, which commenced from October 2012, affecting both employers and employees.
What do the changes mean for employers?
Since 2012, employers have been required to automatically enrol all ‘eligible jobholders’ into
either the National Employers Savings Trust (NEST) or an alternatively another form of scheme, such as a Group Stakeholder Scheme, Group Personal Pension Scheme or an Occupational Pension Scheme which is deemed as a ‘qualifying’ or a ‘certified’ workplace pension. Both employers and employees have to make minimum contributions into the scheme, though employees are allowed to opt out. The process was staged, dependent on employee head count, from 1st October 2012 to 1st February 2018, with large employers being the first to have to
take action.
Who needs to be automatically enrolled?
All jobholders working in Great Britain aged at least 22 years old who have not yet reached State Pension age and are earning more than £10,000 a year (threshold subject to periodic review) will need to be automatically enrolled into either an employer’s workplace pension or NEST.
What is the minimum contribution employers must pay?
Under NEST (or an alternative ‘qualifying scheme’), employers will need to contribute 1%-3% (phased) on a band of earnings for eligible jobholders – between £6,136 and £50,000 (2020/21). This was supplemented by the jobholder’s own 1%-4% (phased) contribution and up to 1% in the form of income tax relief. From April 2019, overall contributions and tax relief are the total at least 8% for this type of scheme.
Who can opt in?
Jobholders aged between 16 and 22, and between State Pension age and 75 who are earning more than the lower earnings figure, are able to opt in to their employer’s workplace pension and will qualify for the compulsory minimum employer contributions. Those earning below the above figure may opt in to their employer’s workplace pension but their employer is not required to make a contribution, but may do so if they wish. Individuals may opt out of automatic enrolment should they choose, but employers will be required to auto-enrol those individuals again, 3 years later.
Which scheme can employers use?
Employers will be able to choose the pension scheme(s) they want to use provided the scheme(s) meet certain quality criteria (including any current scheme). These may be based on contributions or benefits people receive.
There is in addition a ‘certification’ process whereby Employers can register an existing scheme ‘as good as’ or ‘better than NEST’ with any of the following being ‘acceptable’.
Money Purchase Schemes (existing):
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A minimum 9% contribution of pensionable pay (including a 4% employer contribution) or;
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A minimum 8% contribution of pensionable pay (with a 3% employer contribution) provided pensionable pay constitutes at least 85% of the total pay bill or;
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A minimum 7% contribution of earnings (3% employer contribution), provided that the total pay bill is pensionable
In order to qualify, an existing final salary scheme will need to have a contracting out certificate in force as this is taken as evidence that the scheme already meets the ‘reference scheme test’ standard. This test requires schemes to commence a pension at age 65, payable for life and must be:
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a) 1/120th of average qualifying earnings in the last 3 tax years, preceding the end of pensionable service, multiplied by
b) The number of years of pensionable service up to a maximum of 40.
Pensions are a long term investment. You may get back less than you put in. Pensions can be
and are subject to tax and regulatory change; therefore the tax treatment of pension benefits
can and may change in the future.