Pension guide

Pension information: guide to the basic facts.

You might have one or more different types of pension. Understanding which you have is important because it affects the decisions you need to make as you approach retirement.

• What type of pension do I have?

• Your State Pension choices

• Your pension choices if you have a defined benefit pension

• Your pension choices if you have a defined contribution pension

What type of pension do I have?

What is a pension pot?

‘Pension pot’ refers to the savings you build up in a certain type of pension known as a ‘defined contribution’ pension scheme. You and your employer (if you are employed) pay into the scheme and this builds up a ‘pot’ of money over time, which you can use to give yourself an income when you want to cut down on how much you work, or stop working altogether. It includes workplace, personal and stakeholder pension schemes.

There are three main types of pension:

• the State Pension

• defined benefit pensions, and

• defined contribution pensions

State Pension

Most people get some State Pension. It’s paid by the government and is a secure income for life which increases by at least the rate of inflation each year.

You build up your entitlement to the State Pension by making National Insurance contributions during your working life.

In some cases, you can do this even when you’re not working, such as when you’re bringing up children or claiming certain benefits.

From April 2016 a new flat-rate State Pension was introduced. For the current tax year 2019-20 the full new State Pension is only £168.60 per week.

However, you might be entitled to more than this if you have built up entitlement to ‘additional state pension’ under the old pre-April 2016 system – or less than this if you were ‘contracted out’ of the additional state pension.

To be eligible for the full State Pension you will need 35 years NI record. You’ll usually need at least 10 qualifying years on your National Insurance record to qualify.

Defined benefit pension

You’re most likely to have a defined benefit (DB) pension if you work in the public sector or for a large company. This is a salary-related pension which pays out a secure income for life and increases each year. The pension you get is based on how long you’ve been a part of the scheme and how much you earn.

You might have a final salary scheme where your pension is based on your pay when you retire or leave the scheme, or alternatively a career-average scheme where your pension is based on the average of your pay while you were a member of the scheme.

Defined contribution pension

With this type of scheme, you build up a pension pot which you can draw an income from when you cut down or stop working. But you must be aged at least 55 before you can start to take money out. With this type of pension scheme, you can usually withdraw at least 25 per cent (a quarter) of your pot tax-free.

The amount that builds up depends on:

• the level of charges you pay

• how well your investment performs, and

• how much you and your employer (if you are employed) pay into the scheme

Defined contribution (DC) pensions include workplace, personal and stakeholder pension schemes.

Your State Pension choices

You won’t get your State Pension automatically – you have to claim it. You should get a letter no later than two months before you reach State Pension age, telling you what to do.

You can also defer taking it. If you want to wait to claim your pension, you don’t need to do anything. Your pension will automatically be deferred until you claim it and will increase by 1% for every nine weeks you defer. This works out at just under 5.8% for every full year.

The extra amount is paid with your regular State Pension payment when you finally take it.

Find out your State Pension age at GOV.UK

Your pension choices if you have a defined benefit pension

Most defined benefit pension schemes have a normal retirement age of 65.

If your scheme allows, you might be able to take your pension earlier but this will reduce the pension you get quite considerably. (Typically 5% per annum)

When you take your pension you usually have the option of taking some of it as a tax-free cash sum.

How much you can take will vary depending on your scheme rules, but often you can take roughly up to a quarter of the value of your pension benefits like this.

Reducing the amount of tax-free cash you take might increase the amount of income you receive.

It is possible to transfer your defined benefit pension to a defined contribution pension which would then allow you to access your pension more flexibly.

However, consider this option very carefully as you might be giving up very valuable benefits.

Before going ahead with a transfer from this type of scheme speak to a regulated financial adviser.

Your pension choices if you have a defined contribution pension

Once you reach 55 you have complete freedom over what to do with your pension pot.

However, the longer you leave your pot to continue building up, the more money you will have to live on in retirement.

To understand the choices for using your pension pot, use could use Pension Wise – the free and impartial service backed by government or if you are still unsure of the best option for you, consider taking regulated financial advice.

Source: pensions advisory service

WINN-BROWN & CO.NOVEMBER 2, 2015

There's no such thing as free pension advice

There is no such thing as free pensions advice.

Almost five years on from when the Government introduced the new pension freedom legislation and it is still difficult to know how things are going.

This has meant that anyone who wants to blame the freedoms for consumer harm can do so.

Last month, the Financial Times published a story based on a freedom of information request about those who had cashed in final salary pensions since 2015.

It found concerns about 80 per cent of the companies providing bad advice in this £80bn market. As a result, the Financial Conduct Authority planned to write to 1,841 financial advisers about potential harm in their advice. 

The estimable Mick McAteer, formerly of Which? and an ex-FCA board member, demanded a full-scale inquiry.

It came in the same month that the FCA admitted too much transfer advice was not at an acceptable standard.

The FCA’s intervention, in its letter to chief executives of financial advice businesses, should be taken with deadly seriousness.

It is clear from the tone of that missive that the FCA has advice companies in its sight – just at a time when the burden of regulation is already at its most choking.

It was interesting to see it positively demanding advisers turn in criminal or rogue businesses – a call I have been making for some time now.

Let’s hope that means good advisers turning the table on introducers and ending all ties with them.

But what are we to make of all this in the context of the pension freedoms?

Are mis-sold pension transfers to blame; is it criminal activity or poor advice; is it reckless consumers; is it contingent fees; was it the fault of the media for cheerleading the death of the freedoms; or is it driven by trustees desperate to reduce their liabilities?

Sadly, it is impossible to know, even though 160,000 people could be affected. 

The key argument against the pension freedoms seemed to be that consumers are fundamentally too stupid to be able to make their own decisions. It is certainly true that most will underestimate their own longevity.

We were told that everyone would gamble their money; if anything, the tentative findings we have already had from the FCA show that people are not taking enough risk.

We know that lots of people have cashed in pots, but any evidence that this only applies to smaller pensions is scant.

It may be the case that many should be taking annuities, but we do not know for sure.

And it is certainly true that when the pension freedoms were launched, the industry was utterly unprepared. 

I have seen arguments for minimum income requirements before people can access the pension freedoms, or that some sectors of the economy could be barred.

All that would do is make freedom a right of the rich – and that is clearly not good.

The freedoms are a great act of consumer empowerment, but having launched them on the public, the Treasury and the FCA should now launch a study into their effects so that we have a full picture of how people are behaving and the advice companies are giving.

It would not be fair for advice companies to bear the brunt of increased scrutiny without greater evidence of what actually has happened since 2015.

Whoever the permanent boss of the FCA is, he or she should make a full assessment of the pension freedoms one of their top priorities.

Source: James Coney is money editor ofThe Times and The Sunday Times@

Pension options at retirement

At retirement when we take our pension from a defined contribution scheme we have a number of options available to us.

• The open market option

• Tax free cash lump sum

• The frequency of payment

• Escalation in payments

• Spouses provisions

• Guarantee periods

Each of these options can be taken in conjunction with any other. However, some of the benefits will defray the initial amount of pension benefit that you would receive should you take a single life pension with no other provisions.

The Open Market Option

The Open Market Option (or OMO) was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.

 The term OMO is now generally used to support a campaign, often led by the pensions industry and the media, to make sure people know the benefits of shopping around. The majority of people still don’t use the Open Market Option in large part because they don’t know they can or don’t realise the benefits of doing so. Retirees who don’t use the OMO and settle for the default deal offered by their pension provider, may be missing out on up to 20% more income from an annuity. This is especially important as retirees cannot change their annuity once it has been purchased.

 One of the main reasons that people can get more from an annuity if they shop around is that they may qualify for what is known as an Enhanced Annuity (sometimes known as an Impaired Life Annuity) which pays a higher income to people who suffer from a range of health conditions – anything from asthma to a serious heart condition. There are also other products available that may suit peoples retirement needs better than the default deal offered by a pension provider. One suggestion to make the most of the Open Market Option is to speak to an independent financial adviser who will explain the different options available at retirement.

Tax Free Cash Lump Sum

At retirement you are permitted to take 25% (a quarter) of your pension fund in as a Tax-Free Cash Lump Sum. In certain circumstances it could be more than this. The Tax-Free cash can be paid by the ceding scheme or the new scheme should you take advantage of your Open Market Option. The remainder will be considered as earned income by HMRC. The amount of tax you pay will depend on your prevailing tax status at the time that you take the pension.

Frequency of Payments

Most pension providers will allow you to take your pension at different Frequencies of Payments, such as annually, quarterly and monthly, sometimes in advance or arrears. Once you have made your decision that is generally how you will continue to receive your income for the rest of your pension annuity.

Escalation in Payment

You can elect to have your pension paid to you at a flat rate for the rest of your life or have it increase in different ways, through Escalation in Payment, typically by 5%, 7.5% etc. Should you choose this option then the initial pension you receive will be significantly reduced but at least you can ensure that your pension retains some degree of inflation proofing. 

Spouse’s Provisions

Typically people will purchase a single life annuity but you can elect to provide a pension for your spouse, through a Spouse's Provision should you wish to do so. This at least ensures that should you die in the short term your spouse will continue to benefit from your pension. Spouses pensions can generally be provided at different rates as a percentage of your own, for example 33%, 50% or even 100%. As with all other pension options its best to check what the pension provider is able to offer.

Again this particular option does reduce the amount of initial pension annuity because you are effectively buying two pensions from the same amount of money.

Guarantee Periods

At outset, as with all these options you can elect to take a guarantee period against the pension. 

A Guarantee Period can be of different duration, again typically 3, 5 or 10 years. This means that the pension will be paid out to your spouse (or in the event of your spouse predeceasing  you, your estate) for the remainder of the term should you die within the guarantee period. For example if you were to take a 10 year guarantee period and then die in year 6 your spouse (or estate) would continue to receive the pension for the remaining 4 year term, after which time, (unless you had provided for a spouses pension) the pension would cease and no other payments would be made.

These options are not offered at the outset of your pension plan as you have no indication at that time what your marital status may be at the time of vesting, the prevailing rates of inflation and your need for tax free cash. Nevertheless the decisions that you make in relation to these options are of great importance both to you and your family should you have one. Moreover once you have made your decisions they cannot be unwound, there are no “U turns”. It is therefore essential that you give consideration to taking professional financial advice at this pivotal and critical time in your financial planning.

The value of financial advice

Those who received financial advice in the 2001-2007 period had accumulated significantly more liquid financial assets and pension wealth than their unadvised equivalent peers by 2012-14.

‘The Value of Financial Advice’, produced by ILC-UK with the support of Royal London, analyses data from the largest representative survey of individual and household assets in Great Britain, the Wealth and Assets Survey. It finds that, even allowing for the fact that some groups are more likely to seek advice than others, those who received financial advice in the 2001-2007 period did better than an equivalent group who did not receive such advice, by 2012-14.

The report examines the impact of financial advice on two groups, the ‘affluent’ and the ‘just getting by’. The ‘affluent’ group is formed of a wealthier subset of people who are also more likely to have degrees, be part of a couple, and be homeowners. The ‘just getting by’ group is formed of a less wealthy subset who are more likely to have lower levels of educational attainment, be single, divorced or widowed and be renting.

‘The Value of Financial Advice’ finds that:

• The ‘affluent but advised’ accumulated on average £12,363 (or 17%) more in liquid financial assets than the affluent and non-advised group, and £30,882 (or 16%) more in pension wealth (total £43,245)

• The ‘just getting by but advised’ accumulated on average £14,036 (or 39%) more in liquid financial assets than the just getting by but non-advised group, and £25,859 (or 21%) more in pension wealth (total £39,895)

The report also finds that financial advice led to greater levels of saving and investment in the equity market:

• The ‘affluent but advised’ group were 6.7% more likely to save and 9.7% more likely to invest in the equity market than the equivalent non-advised group

• The ‘just getting by but advised’ group were 9.7% more likely to save and 10.8% more likely to invest in the equity market than the equivalent non-advised group

Those who had received advice in the 2001-2007 period also had more pension income than their peers by 2012-14:

• The ‘affluent but advised’ group earn £880 (or 16%) more per year than the equivalent non-advised group

• The ‘just getting by but advised’ group earn £713 (or 19%) more per year than the equivalent non-advised group

The report found that 9 in 10 people are satisfied with the advice received, with the clear majority deciding to go with their adviser's recommendation.

Despite the advantages of receiving advice, only 16.8% of people saw an adviser in the years 2012-2014. Indeed, ‘The Value of Financial Advice’ finds that even amongst those who took out an investment product in the last few years, around 40% didn’t take advice, rising to 78% of people who took out a personal pension.

After controlling for a range of factors, ‘The Value of Financial Advice’ concludes that the two most powerful driving forces of whether people sought advice was whether the individual trusts an Independent Financial Adviser to provide advice, and the individual’s level of financial capability. Therefore, the report makes a series of recommendations to raise demand for financial advice including:

• Using advice to support the auto-enrolled – duty on employers to ensure staff can access the best information and advice on their pensions

• Mandating default guidance for those seeking to access their pension savings – to ensure people can get crucial information in a complex marketplace and avoid worst outcomes

• Helping to create informed consumers through continued development and roll out the pensions dashboard

• Ensuring regulators continue to place emphasis on access to independent financial advice

Ben Franklin, Head of Economics of Ageing, ILC-UK said:

“Our results show that those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages.

But the advice market is not working for everyone. A high proportion of people who take out investments and pensions do not use financial advice, while only a minority of the population has seen a financial adviser. Since advice has clear benefits for customers, it is a shame that more people do not use it. The clear challenge facing the industry, regulator and government is therefore to get more people through the “front door” in the first place.”

Source: A Research Report from ILC-UK

The cost of the State pension

What do I need to know about the state pension

The State Pension is a regular payment from the Government that you can claim when you reach your State Pension age.

Your State Pension is based on your National Insurance record. It takes into account the National Insurance you built up before the new State Pension was introduced in 2016, as well as contributions and credits since then. So not everyone will get the same amount.

The full amount of new State Pension is currently £168.60 a week – that’s just over £8,750 a year, but it’s important to check your State Pension online. It will tell you the amount you’re predicted to get, and the date you’ll reach State Pension age under the current rules.

However, this amount is probably insufficient for most people to live on and in real terms should only form the foundation for your retirement provisions.

National Insurance contributions.

You need to have paid national insurance contributions for at least 10 qualifying years, these years need to be qualifying years. A qualifying year means a year in which you earn over the Lower Earnings Limit as salary (dividends don't count). How much you receive will also depend on how many qualifying years you have. You need at least 35 qualifying years to qualify for the full amount.

If you check your state pension online it will also show you your National Insurance record, and whether you can improve it. You might be able to fill gaps by claiming National Insurance credits, or making voluntary National Insurance contributions.

You usually need to have 10 qualifying years on your National Insurance record to get the new State Pension, but you should check to see how your circumstances affect your National Insurance record.

What is the state pension?

The full amount of new State Pension is currently £168.60 a week – that’s just over £8,750 a year.

If you reached state pension age before 6 April 2016, you will receive the old state pension instead, which may be a different amount.

When can I start drawing my state pension?

The state pension age is currently 65 for both men and women, but may be different depending on when you were born. Answering the question ‘When will I get my state pension?’ means working it out from the year (and often the month) in which you were born. You can check your state pension age on the government’s website.

From April 2026 the state pension age will begin further increases to 66, and then to 67 by March 2028. It is expected to reach 68 by around 2044.

Work and the claim state pension?

Should you wish you can carry on working and earning once you’ve passed state pension age and began to draw your pension, but you’ll no longer pay National Insurance after this point. However state pension is still considered to be earned income, so could be subject to tax depending on how much other income you continue to earn. You may wish to talk to a financial adviser to make sure you’re not wasting too much of your state pension in tax. It may make sense to scale back your hours or find another solution.

Claiming the state pension from overseas

If you live abroad or are planning to move abroad and want to claim state pension, you’ll need to contact the International Pension Centre. You can then arrange for your state pension to be paid directly into a bank account, either located in the UK or in the country where you’re living now. You can choose to be paid every four or 13 weeks.

Should I delay taking my state pension?

If you choose not to take your state pension from the state pension age, the amount you’re entitled to will gradually rise. For every year you delay it, the amount you can receive will rise by around 5.8 per cent.

You might choose to do this if you were still working and didn’t want to lose state pension money in tax.

No you need to make more provision for your retirement than the State Pension offers you? - Then speak to a Financial Adviser and get some guidance.