Pensions

What is a Pension?

It is simply a tax efficient retirement savings pension plan which is invested in order to provide a source of income on retirement. You put money into your account, and in return, you get a regular income once you’ve retired. You don’t have to pay tax on your contributions.

There are three types of pension :

  1. State pensions
  2. Workplace pensions
  3. Personal pensions

1. State Pension

When people reach their retirement age (currently between 62 and 65 for women and 65 for men), they will receive an income from the state, called the state pension. To claim this,  you have to have made National Insurance contributions throughout your working life.

2. Work Place Pension’s

Workplace pensions take contributions from you, your employer and the government. Your contributions are usually taken as a percentage from your salary each month. In turn your employer’s will also be added as a percentage of your pay.

a) Defined contribution and money purchase schemes

A defined contribution, sometimes known as a money purchase scheme is a type of workplace pension. It is built up through your own contributions, those of your employer and tax relief from the government. Defined contribution schemes give you an accumulated sum on when you come to retire, which you can use to secure an income through buying a product called an annuity or opt for income drawdown.

b) Defined benefit and final salary pensions

A defined benefit scheme, more commonly known as a final salary scheme promises to pay out an income based on how much you earn when you retire. This means that the amount you will receive at retirement is guaranteed and is a pre agreed amount. It is also paid directly to you. Hence the reason why they are called defined benefits.

3. Personal Pension’s

These work by you paying money into a scheme from a provider that is independent of the contributor’s employer. At the end of the pension you receive a sum with which to buy an annuity, although this will not be enforced from April 2015 onwards. An annuity is a type of financial product that gives you retirement income for life. Personal pensions are particularly suitable for the self-employed or who don’t have access to workplace pensions. It can also benefit those that want more flexibility on where their money is invested or have a greater knowledge of the investment market.

However, pensions are only as good as the products they are invested in. The returns on money invested by pension companies on behalf of savers fell every year between 2000 and 2010. Pension companies traditionally have invested higher sums in stocks and shares which suffered most with the recent recession.

New UK Pension Rules April 2015

April 2015 is a critical date in the history of pensions and it’s important you understand the changes, the options available to you and how this could affect you.

What are the options for cashing in my pension?

If you’re paying a fixed amount each month into a scheme, but the final pension you will draw down on depends on the performance of funds where the provider invested the money, you have a defined contribution pension. The new rules on 6th April 2015 represent a revolutionary shake-up of the UK’s pensions system, giving people a great deal more control over their pension savings than before.

Before April 2015, you had to take an annuity. The downside is that the majority of the Pension Providers get to keep the rest of your retirement pot after you die. From April 2015 the rules will change. At the age of 55 you will have greater freedom in terms of what you want to do. There will be no forcing of taking out an annuity. In fact you could take out all the cash in one go. However you will be taxed from 20-45% and it would be wise to take some advice before you decide on doing this. At the age of 55, you can take a 25% tax free lump sum from your pension. The remainder of your pension is taxable if you decide to withdraw it.

Take out a Pension income drawdown

You could decide to take an income drawdown. With income drawdown, you can keep your funds invested and draw down as and when you need it. You can also transfer your pension into a personal pension like a SIPP or a SASS if you are aware of the investments you prefer or have knowledge of. Changes create more choices but these choices require some knowledge and help. Refer to our pension transfers page by clicking HERE

A beneficial change is that you can pass over your pension funds to a beneficiary after death. If you die before the age of 75, your beneficiaries inherit the pension fund tax free. If you die after the age of 75, your beneficiaries will pay 45% tax as one lump sum. If they choose to take the pension as income, they will be taxed at their income tax rates.

Final Salary pension are less affected by the April 2015 rule changes. But one major change is that you will be able to transfer from private final salary pension to a private one. If you have knowledge of investment opportunities and would like to move your final salary pension into a private SIPP or SASS then this could benefit you. You will need to take advice first which one of our financial advisers (IFA) can assist you with.

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