Retirement
An introduction to pension and retirement planning
Reviewing pensions
How much should I contribute?
What income can I expect?
Options at retirement
Personal Accounts (NEST)
What type of pension is the right choice for me?
Years ago people carried on working until they literally dropped, but now most of us would like to retire fairly early and enjoy this phase of our lives. People are living longer and retirement can last for 20 or 30 years. The state provides a basic pension, but for many of us this will not give the standard of living that we would like to enjoy in our well earned retirement, and therefore another source of income will be required. Added to this, the age at which those not already retired we will receive the state pension is going to rise and you will have to wait till 66, 67 or even 68.
The basic principle of pension planning is the same - whether your employer offers a company pension scheme, or you have to make your own arrangements: the sooner that you start making contributions, the more comfortable your retirement could be.
There are 3 main types of pension:
There could be one of two options provided by your employer, whether this is linked to your length of service and salary through a defined benefit or final salary scheme, or through a defined contribution or money purchase arrangement, where the pension available will be dependent on the fund built up to retirement. An employer will make contributions to these schemes and therefore the advice in most cases would be to join.
The third type of pension scheme is also a money purchase arrangement through a personal or stakeholder pension plan, usually provided by an insurance company, where an individual can fund for their retirement, with choices to match personal preferences. In some cases an employer will offer a group personal or stakeholder plan.
One type of pension scheme that has received a good deal of attention in recent times is a Self Invested Personal Pension scheme or SIPP.
A SIPP is a money purchase scheme, and though this use to be regarded as an option only for those with larger pension funds, now that the costs on managing a SIPP have fallen and it can provide a very flexible plan through your working life and into retirement.
Whichever type of pension scheme is available or most appropriate for your circumstances; pension planning should be viewed as a long term investment.
At Harris and Associates Financial Consultants Limited we can advise you on deciding the best way to save for your retirement right through to advising on the most appropriate way to invest your accumulated funds to receive income in retirement.
The value of an investment is not guaranteed and can go up and down depending on investment performance. You could get back less than you have paid in.
Planning for your retirement should be an on-going process throughout your working life. Regular reviews of any arrangement are important to make sure that your planning remains on track to provide for your retirement, especially if your circumstances change whether this is personal or any changes in your employment.
It is possible that you may have benefits with a previous employer, or you may be contributing to an arrangement that was set up some time ago, and though it may have been suitable at that time may no longer be the most appropriate way to save.
Pensions have changed considerably in recent years with the introduction of Stakeholder Pensions in April 2001 and with ‘Pension Simplification’ introduced in April 2006. The introduction of Stakeholder pensions led to the removal of initial, or "up front" charges, for many arrangements and the imposing of a maximum annual management charge. Any funds built up within a Stakeholder pension can be moved to another pension provider, at any time and without the imposing of any "transfer penalties" which in most cases would still apply to funds within older schemes. At the same time new personal pensions were introduced with charges similar to stakeholder.
Individual pension planning was introduced in the 1950's, with early plans identified as Retirement Annuity Contracts (RAC's) and latter contacts referred to as Personal pension Plans and a great deal was made of their portability. In the event that you changed employer you were able to take your fund with you, however you were unable to change the company you were saving with, without a potential penalty. Stakeholder introduced complete portability.
New changes known as Pensions Simplification took effect from April 6th 2006 and this has had the effect of simplifying the existing 8 tax regimes into one set of rules governing contributions and the way in which benefits can be taken. These changes affect anybody that has any form of pension plan saving for retirement, and some of the new rules are summarised briefly below.
Lifetime Allowance - Each person will have a maximum permitted tax-exempt fund. Initially this was £1.5million in 2006 rising to £1.8million in 2010/11. If your total pension fund is above this level and if you take retirment benefits now there will be a tax charge.
Annual Allowance – This replaces the existing limits for all types of schemes and it is now possible for an individual to pay 100% of earnings up to £255,000 for 2010/11 and receive tax relief, or £3,600 gross for those without any earnings. It is also possible for members of occupational pension schemes to top up benefits into their own arrangement again up to this level.
Tax Free Cash (PCLS) – This is called Pension Commencement Lump Sum (PCLS). It will be possible to take up to 25% of the fund at retirement as a lump sum, irrespective of the scheme. The calculations on a final salary scheme are slightly more complicated, and will depend on the scheme. Some people may already have entitlement to a lump sum greater than 25% from some occupational schemes.
Retirement Age - The concept of a normal retirement age has disappeared, along with the constraints on drawing occupational pension benefits while still employed by the scheme sponsor (employer). The minimum age for drawing benefits is now 55 years unless retiring on ill-health grounds or having a protected lower retirement age.
Death Benefits before Retirement - The maximum lump sum death benefit will simply be equal to the lifetime allowance at the time of death. Any excess lump sum will be subject to a 55% tax charge on the recipients. Survivors' pensions can be provided as well as a lump sum though these will be taxable.
Income in Retirement - Retirement income will come under four main categories: lifetime annuities, scheme pensions, unsecured pensions and alternatively secured pensions that will only be available from age 75.
Despite the name of Pensions Simplification, the implications, new limits and changes for some individuals are far from simple and advice is essential to ensure that you benefit from the flexibility that it can offer.
At Harris and Associates Financial Consultants Limited we have the expertise to review existing arrangements, and help you decide on an appropriate course of action.
The simple answer is: as much as you can afford! Depending on your age when you begin saving, experts recommend that at least 10% of your salary, increasing as you get older!
The most important thing is for you to increase your contributions as your earnings increase, and this is encouraged by the government in the amount they allow you to save into pensions.
In the past, saving into a pension was dependent on having earnings on which to base the level of savings an individual could make. This meant that many including students, the unemployed, and people unable to work through illness and mothers taking a career break were unable to contribute into pensions.
Most individuals are now allowed to invest up to £2808 net into a pension each tax year regardless of whether they are earning or not. That net premium of £2808 is automatically uplifted to £3600 by the addition of basic rate tax relief (20%) regardless of whether they pay tax or not. Money for nothing!
This also provides an opportunity that parents and grandparents can set up a pension for their children/grandchildren thereby setting them off on the pension savings ladder.
If you are a member of a company pension scheme you will normally be expected to contribute a certain percentage of your salary into the scheme, but it is now possible to top up your benefits into an additional arrangement either with your company or into your own plan.
At Harris and Associates Financial Consultants Limited we can discuss your current requirements, your affordability and expectations and provide you with recommendations and illustrations of what you might be able to receive at retirement.
The pension that you will eventually receive will depend on the type of arrangements into which savings have been made.
From a final salary scheme or defined benefit scheme the amount of income you can expect each year is worked out using a set formula.
The company might pay you, say, 1/60th of your final pay for every year you have worked there. For example, if you have worked for 25 years and your final salary is £25,000, you will receive 25/60ths of £25,000, which is £10,417 a year. It should be possible to exchange part of the pension for a tax free lump sum, now known as the Pension Commencement Lump Sum.
From a money purchase scheme, whether this is from your employer or through saving into a stakeholder or personal pension, the amount will depend on how much your fund has grown and how much pension this can buy you at that time. Again it is now possible to take up to 25% of the final value as a lump sum.
The return on your investment depends mainly on the performance and the type of fund(s) you have chosen to invest in and plan charges for managing the pension plan and funds.
As with any long-term investment, the value of funds can go down as well as up and past performance is no indication of future performance.
At Harris and Associates Financial Consultants Limited we can help to provide you with an idea of what you may receive at retirement and what you should be saving in order to meet your expectations.
You have been saving during your working life and are now beginning to look forward to your retirement. Perhaps you have been a member of your employer’s pension scheme, or you have been making your own arrangements. It may be that you are considering “winding down” and gradually retiring. Whatever your circumstances there are decisions to be made as to how you take your pension.
At retirement, depending on the fund value and the type of scheme in which you built up your benefits an income can be taken as a Scheme Pension from an occupational scheme, buying a Lifetime Annuity either from the pension provider or out on the open market or by drawing an income from the funds through what is now known as Unsecured Pension or Alternatively Secured Pension, for those who are post age 75.
This can be arranged through some form of pension fund withdrawal contract or a SIPP and has become increasingly popular in recent years in providing flexibility as you approach what may be many years of retirement, but is not suitable for everyone.
All of us are different, and therefore the solutions will be different depending on the size or your funds, your own personal circumstances including your health and whether you need to provide a pension for your spouse or partner after your death, and how much of a risk you are prepared to take if you leave funds invested.
You have choices and at Harris and Associates Financial Consultants Limited we have experts that can help you make your decision.
From 2012 Employers and Employees will be forced to make contributions to a Pension Scheme. For many this will mean a considerable overhaul in the way that they both look at pension provision and how they operate company pension schemes. This is a complicated area for employers and this site is designed to give a brief overview of current situation. We would strongly advise that companies seek advice from us as soon as possible to discuss their options. We have below provided a link to a simple informative booklet from one of the key providers or workplace schemes. Please contact us directly for an initial meeting.
Scottish Widows | Pensions Reform Employer Information this document is provided by a third party and Harris & Associates holds no liabilitiy for the content.
In 2012 the UK Government will introduce a new pension scheme to the UK.
Previously known as Personal Accounts, former pensions minister Angela Eagle announced the new brand - The National Employment Savings Trust - NEST on 7th January 2010.
The initiative is part of an overall general pensions reform strategy and will create a significant change in the way people save for their pensions and retirement in the UK. For the first time employees and employers will be forced to contribute to a NEST pension (formerly known as a personal account pension) on behalf of the employee, unless they choose to opt out or unless they already contribute to an alternative qualifying workplace pension.
The Government created the scheme to make it easier for mainly low to middle income workers to access an employer sponsored pension scheme or workplace pension.
The final details of the structure of Personal Accounts are still being finalised. At the time of writing the key facts are as follows:-
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Personal Accounts (NEST) will be introduced in April 2012 as a "new way to save". They will effectively be a trust-based defined contribution occupational pension scheme, run on an occupational basis and administered by employers.
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All employees will be automatically enrolled into a personal account (NEST) as long as they are aged between 22 and the state pension age; they earn more than the Primary Threshold (£5,225 per annum in 2007/8); their employer does not already offer a pension scheme meeting minimum criteria of a Personal Account (NEST) than a personal account.
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There are likely to be several investment funds to choose from (including environmental and ethical options), as well as a default fund for those not wanting to make a choice. Once an individual has begun a personal account (NEST), it will stay with them throughout their career, regardless of when they change employers.
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The aim will be to accrue a fund which will provide an income in retirement. As with traditional money purchase pensions the policyholder will not be able to access the funds before age 55 when there will also be an option to take 25% of the fund as tax free cash.
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As far the contributions are concerned, the Government intends for employees to pay 4% of their earnings, employers 3%, while at the same time contributing an extra 1% itself via basic rate tax relief. This 8% minimum contribution will be phased in from October 2016 (for example from 2012 until October 2016 employers will only have to pay in 1%).
The Government is currently considering ways to reduce the impact on existing pension provision, including limiting the maximum that can be paid into personal accounts to £5,000 per annum (£10,000 in the first year) and banning transfers into, or out of, personal accounts. The Government has established the Personal Accounts (NEST) Delivery Authority (PADA) to oversee the introduction and a Personal Accounts Board with independent trustees to oversee them once they are up and running. Whether they will be regulated by the Pensions Regulator or the Financial Services Authority is still a matter of dispute.