Planning For Retirement
Planning for retirement - the basics
Since 6 April 2006 (known as A-day), all pensions in the UK have been subject to the same legislation.
Pensions have two classifications; they are either defined contribution or defined benefit.
Defined contribution - you know how much you, and possibly your employer, is paying, but you have no guarantee of the amount payable to you in retirement.
Defined benefit - usually occupational final salary schemes where you have a 'promise' of a pension at retirement linked to your salary and service with an employer.
Pension contribution levels
- Personal contributions can be up to £3,600 with no reference to earnings, or 100% of earnings if greater. Employers can pay any amount, capped to a level known as the annual allowance (see tax tables). Contributions are limited to £40,000 a year (known as the annual allowance), but unused relief from the previous 3 years can be carried forward.
- Anyone with earnings in excess of £150,000 has a tapered annual allowance, reducing to £10,000 for anyone earning more than £210,000 p.a.
- Anyone who has taken any income from a personal pension via Flexi-Access income drawdown has a reduced annual allowance of £4,000 from 2017 onwards.
- Personal contributions attract basic rate income tax relief at source as long as the contribution levels are not exceeded. Higher rate income tax relief is available to higher rate income tax payers and additional higher rate income tax payers.
- Employer contributions are usually treated as a trading expense and attract corporation tax relief.
- Third party payments can be made so for example, contributions up to £3,600 p.a. can be made for children.
- Contributions are invested in funds which grow free of both income and capital gains taxation. Tax-credits on dividend income cannot be reclaimed. On death, benefits are not normally subject to inheritance tax. There can be exceptions to this however.
- There is an overall maximum fund that can be accumulated known as the lifetime allowance (see tax tables). This is currently £1.m.
- It is possible to protect against any lifetime allowance tax charges (up to 55% on the excess) by using transitional protection.
- The minimum age is 55.
- Retirement benefits can be taken at any age and no longer have to be taken by age 75.
- Some occupations have early retirement ages with special rules being applicable e.g. some sportsmen for example.
- Part of your pension can be commuted for tax free cash, usually to a maximum of 25%.
- Plans that pre-date 6 April 2006 could provide entitlement to higher tax free cash.
- The balance of your fund is used to provide you with an income for the remainder of your life.
Types of pension plans
- Stakeholder pensions - a low cost type of personal pension with charges capped to a maximum of 1.5% p.a. annual management charge for the first 10 years, 1% p.a. thereafter.
- Personal pension - can have higher charges than stakeholder pensions, often in return for better investment choices.
- Self-invested personal pension - a personal pension but with a very wide range of investment choice which can include commercial property and direct equity holdings.
- Retirement annuities - the forerunner of personal pensions, they sometimes have beneficial contract terms.
- Executive pension plans - a type of occupational pension arrangement primarily designed for directors of small limited companies.
- Small self-administered schemes - a version of executive pension plans but with wider investment powers which often include commercial property.
- Contracted-in money purchase scheme (CIMPs) - offered by medium to large companies as an alternative to final salary schemes. Members are contracted-in to the State Second Pension.
- Contracted-out money purchase scheme - similar to CIMPs but members are contracted-out of the State Second Pension.
- Defined benefit scheme - often called final salary schemes, these are generally available to those working for larger employers. Many schemes are closed to new entrants.
- Statutory schemes - these includes schemes such as the Teachers' Pension Scheme, the NHS Superannuation Scheme and the Local Government Pension Scheme. These are final salary schemes offering guaranteed benefits to members with pensions which are fully index linked in retirement.
- AVC/FSAVC - additional voluntary contributions/free-standing additional voluntary contributions which can be made by members of either defined benefit or defined contribution schemes to boost their retirement provision. Free-standing AVCs have ceased to exist post 6 April 2006.
- NEST: The National Employment Savings Trust which will commence in October 2012 for the largest employers and it will be phased in gradually. It will ensure that all employed workers have access to a pension arrangement and that the employer will contribute. Employees will be auto-enrolled unless they choose to opt out. For more information see: www.nestpensions.org.uk.
Benefits on death before retirement
- The most common form of benefit is a return of the accumulated fund on death before retirement. It is very important to complete an expression of wishes form so that your provider has a clear idea of whom you wish to benefit. You need to remember to keep these instructions up to date.
- Some older arrangements offer a return of premiums only in the event of death before retirement. You should take advice about this.
- Many employers have death in service benefits available as a lump sum which is usually a multiple of salary, most commonly 3 or 4 times salary on death. Members of these arrangements need to ensure that their expression of wishes is kept up to date.
- Some schemes provide a pension to a spouse or registered civil partner on death before retirement and some also provide pensions for children.
Benefits on death after retirement
- Depends on the type of arrangement that you have.
- Final salary schemes usually provide a spouses/civil partner/dependents pension on death after retirement.
- For defined contribution schemes the benefits on death after retirement will depend on how you have taken your benefits and what decisions you've made at that time. Options can include provision for a dependent.
Our consolidation service
It has become rare to have a 'cradle to grave' job. The result is that it is very common for people to end up with lots of relatively small pension arrangements which can be complicated to keep track of.
An additional complication is that many product providers have merged with other companies and keeping track of your plans can be difficult. Some have ended up as so called 'zombie' funds.
We can help you to make sense of your various plans and help you consolidate them into one easy to manage arrangement if it isn't detrimental to do so. Some older style plans can have guarantees that shouldn't be given up, but these are becoming fewer in number gradually.
Please complete our pension consolidation enquiry form and we'll be in touch with you to see if we can help.