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

More ‘Daves’ than women running funds

More funds have a manager called David or Dave at the helm than a woman, research has shown.

According to figures from Morningstar, 108 UK-listed open-ended funds are run by managers named Dave or David — the equivalent of 7.2 per cent of the 1,496 funds in the market.

Meanwhile just 105 funds are run by female fund managers, also accounting for 7 per cent of all open-ended funds.

Other common names included Paul, with 87 funds having a man called Paul in charge, James (65 funds) and Nick (62 funds).

The most common female name among fund managers was Kate, at 12 funds, while Johanna and Katie both had 10.

Jason Hollands, managing director at Tilney Bestinvest, said the proportion of female managers was “embarrassingly low”, particularly compared with other professions such as law and accountancy. 

Ann Cairns, executive vice chairman of Mastercard and global co-chair of the 30% Club, a campaign group of chairpersons and CEOs taking action to increase gender diversity on boards and senior management teams, said: “This data is disappointing, but nothing new.

"Perhaps the biggest blocker to gender balance within the asset management industry is the perception that it is a male-dominated culture. 

The 30% Club’s Think Future Study found that financial services rated a lowly 12th on the list of career choices for female students, versus 4th on the list for male students."

Ms Cairns said it was "vital" more women were encouraged into asset management, noting internships and early exposure was key to encourage more women to enter the industry.

Emma Morgan, portfolio manager at Morningstar Investment Management Europe, agreed, adding it was a "great shame" the industry was missing out on a swathe of talented individuals.

Just yesterday (November 19) the Financial Conduct Authority published a damning report on how little progress had been made towards achieving gender diversity in the financial services industry.

The regulator warned diversity had remained "consistently low" at industry level, with a female quota of approximately 17 percent of FCA approved individuals.

Diversity is an issue featuring increasingly in the spotlight in the world of finance and several non-profit organisations are working on the problem. 

Campaign group 100 Women has recently launched a female fund manager visibility campaign and Gain, set up by fund manager Charlotte Yonge, aims at inspiring young women of sixth form age (typically aged 17 and 18) about a career in asset management.

Source: imogen.tew@ft.com

Pension drawdown costs.

The charges and fees on pensions with a drawdown facility can vary considerably depending on which provider you choose.

Under pension drawdown (also called “income drawdown”) you are permitted to take money from your pension funds as and when you want to. At the same time you may leave the remainder invested whilst still in retirement.

Here are the sorts of costs you would typically pay when taking advice in setting up a drawdown pension, these fees can vary depending on your situation. We can break these costs down as follows:

• How much does a drawdown pension cost?

• Choosing the right pension drawdown product for you

• Speak to an income drawdown expert

How much does a pension drawdown cost?

The costs involved in pension drawdown are individual/pension specific.

All providers will work to different terms and the associated costs could have a big impact on how much you end up paying. Typical pension drawdown charges include (but are not limited to):

• Set-Up Fees - Typically a standard fee

• Administration Fees - Typically a standard fee but some lenders may calculate costs based on how much you have in your pension pot.

• Fee(s) on withdrawal(s) of the 25% tax-free sum - Some providers don’t charge for any withdrawals of the 25% tax-free sum, others may charge a fee (set or variable) per withdrawal

• Fee(s) on additional withdrawal(s) over  25% tax-free sum - Some providers don’t charge for any withdrawals of the 25% tax-free sum, others may charge a fee (set or variable) per withdrawal

• Income Tax charged on each additional withdrawal - Withdrawals outside the 25% will be added to any other income you have which could impact how much Income Tax you pay

• Fees for ongoing pension drawdown management - Some providers will charge a set fee, but many will charge a percentage of your pension funds    

• Transfer fee / exit charges - Typically a standard fee

You would be advised to carry out a pension charges comparison to find out which income drawdown product is best suited to you before you commit to a product.

Choosing the right pension drawdown product.

The first 25% of your pension is tax-free, irrespective of whether your fund is £40,000 or £400,000. After that HMRC consider the remaining 75% to be earned income and therefore taxable. The amount you take after the initial 25% could potentially limit how much you can pay into a pension in the future.

You should be aware that by taking any income outside of your 25% tax-free allowance could potentially put you in danger of being pushed into a higher tax bracket, as these funds will be added to any other taxable income you have.

You also should be aware of the lifetime allowance as further tax may also apply if the value of your pension savings exceeds £1,030,000 when you access the funds.

Speak to an income drawdown expert

We can arrange a free pension review for you today.

Income drawdown

You can get an income from your pension pot that’s adjustable. This means you get a regular income but can change it or take cash sums if you need to. 

● You get 25% of your pot as a single, tax-free cash sum

● The other 75% is invested to give you a regular but taxable income 

● You can adjust, to suit your specific needs, the income you take and when you take it

This option is also known as ‘flexi-access drawdown’. 

You will need to be involved in choosing and managing your investments, which is why previous investment experience would be beneficial. The value of your pot can go up or down. 

As not all pension providers offer this option, you can transfer your pot to another provider but you will probably have to pay a fee. 

Taxation 

The income you get from the investment is taxable. Your provider will pay you the income net of tax. 

You pay tax when you take money from your pot. This is because when you’re paying into your pension you get tax relief on your contributions. 

Example 

You have a pot of £100,000 and take a tax-free lump sum of £25,000. This leaves you with £75,000 to invest. You get an income of £3,750 a year from your investment. If you pay 20% tax you’ll get £3,000. 

If you take the 25% tax-free lump sum, you must get an adjustable income with the rest or use one of the other options . 

You can move your pot gradually – you don’t have to move it all at once. Each time you move a sum, 25% is tax free. 

If you choose this option, you can leave your money to someone when you die but they may have to pay tax on it, depending on a number of factors.

How adjustable income works 

Different investments have different risks. You pick the investments that match your attitude to risk and get a retirement income from them. You need to think about how much you take out every year and how long your money needs to last . 

A financial adviser can help you create an investment plan for your money. They can advise you on how much you can take out to make the money last as long as possible. They’ll charge you a fee for this. 

Your provider is likely to charge you fees for managing your investments and whenever you get a payment. 

If your provider collapses you’ll be covered by the Financial Services Compensation Scheme . 

Continue to pay in 

If you have more than one pension pot, you can take an adjustable income from one and continue to pay into others. However, you may have to pay tax on contributions over £4,000 a year (known as the ‘money purchase annual allowance’ (MPAA) ). 

This includes your tax relief of 20%. For example, to get a contribution of £3,000 you would only have to pay in £2,400. 

You may still be able to pay into the pot you take your adjustable income from but you won’t get tax relief on these payments. 

Financial advice 

If you’re interested in this option you might want to get financial advice first. A financial adviser can help you to compare adjustable income products and work out which is best for you. 

Scams 

Beware of pension scams contacting you unexpectedly about an investment or business opportunity that you’ve not spoken to them about before. You could lose all your money and face tax of up to 55% and extra fees. Please see out blog on scams.

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.