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@

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.

Get to know your pension

Saving for later life - pensions

Your retirement income is made up of the State Pension, your workplace or private pensions, plus any additional savings you may have. 

Get to know your pension and you can feel more secure about your future. 

State Pension 

The State Pension is a regular payment from the government that you can claim when you reach your State Pension age. Getting to know your State Pension can help you plan ahead for your retirement. 

The amount you receive is based on your National Insurance record. In 2019/2020 the full rate of new State Pension is £168.60 a week – that works out at over £8,750 a year – but not everyone will get the same amount. 

Visit www.gov.uk/check-state-pension to find out what you could receive, and the earliest you can claim it, under the current rules. This service also shows you your National Insurance record. You may be able to improve your forecast by filling gaps in your record. 

Your State Pension is a good foundation, but you should consider how much you need to save for the lifestyle you want when you retire, and think carefully about saving for your future. Find out more at www.yourpension.gov.uk 

State Pension age is regularly reviewed and can change, so it is important to check it. 

National Insurance Contributions and Credits 

Most people pay National Insurance contributions when they are in work. 

You can also get National Insurance credits if you are claiming certain benefits. You may be eligible if, for example, you receive disability benefits, are a carer or are bringing up children. 

Many of these are given to you automatically but others need to be applied for. 

For more details on how to apply, visit www.gov.uk/national- insurance-credits.

 Checking your State Pension can help you identify gaps in your record. If there are gaps, you may want to make voluntary National Insurance Contributions to fill them. 

Pension Credit 

Regardless of gender, if you’ve reached women’s State Pension age and your weekly income is less than £163.00 (for single people) or £248.80 (for couples)* you may be able to get extra income from Pension Credit. Visit www.gov.uk/pension-credit to check if you’re eligible and what you might receive. 

* These amounts may be higher for those who are severely disabled, have caring responsibilities or certain housing costs. 

Workplace Pension 

A workplace pension is an easy way to save for later life and the earlier you start, the more you’re likely to have when you retire. 

Whether the employer you work for is large or small, even if it is just you and your boss, you could benefit from a workplace pension. 

Get to know the benefits:

 1. Saving into a workplace pension is easy: if you are eligible you

don’t have to do anything as you will be automatically enrolled into a pension by your employer. 

2. When you pay in, your boss pays in too. 

If you don’t save into a workplace pension when you get the chance, or you choose to leave it, then you’re giving up this extra money from your employer. 

For more information visit www.workplacepensions.gov.uk 

Pension Wise 

Pension Wise is a free and impartial government service. It can help you understand the different ways you can take your pension pot. 

Your are eligible for a free guidance appointment if you are over 50 and have a defined contribution pension (not a final salary or career average pension). 

A defined contribution (DC) pension is a personal or workplace pension based on how much you, and possibly your employer, have paid into your pension pot. With this kind of pension you decide how to take your money out. 

You can have your appointment with a Pension Wise guidance specialist over the phone or face-to-face in hundreds of locations across the UK. All guidance is impartial – our specialists won’t recommend any products or companies and won’t tell you how to invest your money. 

Book your free appointment by calling 0800 138 3944 or go to www.pensionwise.gov.uk and get to know your options. 

How well do you know your pension? 

Is it worth saving into a pension? 

Most people can expect to get back more in retirement than they put into their pension. Most people saving into a workplace pension also benefit from contributions from their employer and the government in the form of tax relief (which means some of your money that you would have paid as income tax goes into your workplace pension instead). 

Will the State Pension be enough? 

The State Pension is the foundation of retirement savings and for many people, relying on this alone could mean a fall in income upon retirement. Saving into a workplace pension means people will have more money to continue doing the things that they enjoy when they retire. 

Retirement seems like a long way off - is it too early to start saving?

Although retirement might seem like a long way off, it’s never too early to start saving. Saving through a workplace pension is easy and, if you are eligible, you don’t actually have to do anything because your employer will enrol you. The earlier you start to save, the more money you are likely to have when you come to retire as your money has time to grow. 

Further information 

www.pensionwise.gov.uk 

You can get further information on pensions and savings from: 

www.moneyadviceservice.org.uk 

Information correct as of April 2019 

www.yourpension.gov.uk 

www.workplacepensions.gov.uk 

www.pensionsadvisoryservice.org.uk