Pensions are, of course, designed to provide you with enough income to live comfortably after you have retired from work.
There are many different ‘tools’ used to save for retirement and the taxation and investment elements of pensions can sometimes appear baffling. As Independent Financial Advisers we specialise in explaining, recommending and monitoring pensions for our clients. There is currently a choice of four sources of pension to fund for your retirement:
The basic state pension – for people who have paid National Insurance contributions while at work or have been credited with contributions.
Additional state pension – this is now the State Second Pension (S2P). Before 6 April 2002, you built up SERPS (State Earnings Related Pension Scheme) pension. Both are available to employees earning more than a given amount (the lower earnings level for National Insurance contributions). Many people who are not working because they are caring for young children or an elderly relative, or because of disability or long-term illness are also able to build up State Second Pension (but not SERPS). Additional state pension is not available in respect of self-employed income.
An occupational pension through an employer’s pension scheme – if your employer runs a pension scheme, it’s usually a good idea to join.
A personal pension scheme (including stakeholder schemes), are open to nearly everyone and especially useful if you are self-employed or your employer doesn’t run a company scheme.
Automatic pension benefits for the employed – In the past, many workers missed out on valuable pension benefits, because their employer didn’t offer them a pension, or they didn’t apply to join their company’s pension scheme. Automatic enrolment changes this. It is compulsory for employers to automatically enroll their eligible workers into a pension scheme. The employer and employee must pay into the scheme.
Automatic enrolment has been phased in over the last few years, starting with the largest UK employers. So, if you’re eligible and haven’t yet been enrolled into your workplace scheme, you should notify your employer.
The rules on how people access their pensions, has fundamentally altered:
• The maximum trivial commutation lump sum increased from £18,000 to £30,000.
In addition, the maximum size of a small pension pot which can be taken as a lump sum, regardless of total pension wealth has increased from £2,000 to £10,000 and the number of personal pots that can be taken under these rules increased from two to three.
Legislation has been introduced to allow those with Defined Contribution pension (Group, employer and personal pensions) savings to draw income from their pensions from the age of 55, subject to their marginal rate of income tax and their pension scheme rules.
The pension commencement lump sum remains tax-free (25% of the fund value) and any income taken after this time can be taken without limit and taxed at the pension saver’s marginal rate.
The Government continues to consult on the age increase at which an individual can take their private pension savings – up from 55 to 57 years of age in 2028; the point at which the State Pension age increases to 67.
The annual allowance remains at £40,000.
Lifetime allowance (LTA) for pensions will increase in line with the Consumer Price Index (CPI), rising from £1,030,000 to £1,055,000 for 2019-20. This is a limit on the value of lump sum or retirement income from your pension schemes that can be made without triggering an extra tax charge.
Generous additional pension fund death benefits also came into force:
Death before 75 years of age:
Tax free to any beneficiary as a lump sum or drawdown pension (Spouse or children -crystallised or un-crystallised and whether or not you’ve taken any benefits)
Death aged 75 or over:
Will be subject to income tax – at the recipient’s marginal rate
IF BENEFITS ARE NOT DESIGNATED WITHIN A TWO-YEAR PERIOD, THEN BENEFITS WILL USUALLY BE TAXED (THE EXCEPTION IS WHERE THE DECEASED WAS UNDER 75 AND ALREADY IN DRAWDOWN).
If benefits are taken as a lump sum and in all cases where the deceased was 75 or over, marginal rates of tax are applied to the recipient.
Lump sum payments to a Trust are subject to a special lump sum death benefit charge of 45%.
When distributions are later made from the Trust a tax credit is attached in respect to the 45% tax already paid. This can be offset against the recipient’s other income in the tax year.
To allow some flexibility, any unused allowance from the three previous tax years can be carried forward to offset contributions above the annual allowance in a single year.
Tax-free lump sum
At present, it is still possible to take a quarter of the value of all pension plans as a tax-free lump sum (known as the pension commencement lump sum – PCLS). If you were entitled to more than this under the old rules, this may have been protected.
If you have previously been topping up an employer’s pension scheme by making additional voluntary payments or have been contracted out of the State Second Pension (S2P) or its predecessor the State Earnings Related Pension Scheme (SERPS), you may or may not be entitled to a larger lump sum.
For most people, State pensions won’t produce the same level of income that you will have become 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 leave it the more you will have to pay in to build up a decent fund in later life.
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 pay coding.
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, at any time from age 55. There are a range of options to consider when you decide to take benefits.
Personal Pensions usually offer a range of investment funds to suit your own attitudes, 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 Stakeholders are generally considered a little cheaper than Personal Pensions, investment choices may be restricted.
Advanced Pensions & Simplification
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.
This is an area of constant change and you should need to take advice regularly to make preparations for a secure and enjoyable retirement.
Self-invested Personal Pensions (SIPPs)
A Self Invested Personal Pension (SIPP) plan is a tax-efficient wrapper in which a wide range of investments can be held (Generally commercial property, land). 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 more 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 range of permitted investments is extensive and includes more conventional investments such as deposits, unit trusts and individual stocks and shares and also more unusual assets such as commercial property. 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 come to investment decisions. Often, there are additional charges for arranging and dealing within a SIPP, and these charges would erode smaller funds quickly.
‘A’ Day arrived on 6th April 2006 and brought with it sweeping and radical changes for all pension plans – whether occupational or personal. These changes allow more flexibility for your retirement planning than previously permitted.
Since this date there is just one set of tax rules for all types of pension, with an individual Lifetime Allowance on the size of the pension fund you can accumulate and an individual Annual Allowance on the amount of contribution payable. These limits may increase each year, and exceeding the limits will trigger a tax charge. Schemes already in existence before this date will need to update their rules to allow some of the new flexibilities.
The ‘A’ Day changes have made the majority of pensions much simpler, with a number of key advantages –
- Pensions are much easier to understand.
- Most customers now have greater flexibility in the size and timing of their contributions.
There will also be a number of other changes including:
- Early retirement age is now 55
- Full concurrency (i.e. being able to pay into a number of different types of pension plan), subject to the annual allowance
- Wide investment flexibility
- Up to 25% Tax Free Cash will be available from the majority of pension schemes
- The ability to commute ‘small’ funds as a one off lump sum as opposing to having to draw a trivial amount of pension income
- Flexible options at retirement when deciding to take benefits
- No need to ‘have to’ secure benefits at age 75 via an annuity
Many 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 can 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.
If you are a company director, we can advise on the best way of funding your pension through the business.
Get in touch
We would love to hear from you and answer any questions you have without any obligation or commitment to proceed.
Tel: +44 (0)1622 843694
Fax: +44 (0)1622 844365