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

Defined benefit/final salary schemes

Defined Benefit Pension also known as a Final Salary Pension or Superannuation Scheme

A defined benefit pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.

These schemes have become rarer in recent years as the employer/sponsor’s have no indication of the eventual cost to them in providing the scheme. Further the company’s directors may be held liable for any shortfall in the pension scheme’s funding. For this reason many employers have moved away from offering DB schemes in order to limit their liability.

A defined benefit plan is 'defined' in the sense that the benefit formula is defined and known in advance. Conversely, for a "defined contribution retirement saving plan", the formula for computing the employer's and employee's contributions is defined and known in advance, but the benefit to be paid out is not known in advance.

The most common type of formula used is based on the employee's terminal earnings (final salary). Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker's career.

In the private sector, defined benefit plans are often funded exclusively by employer contributions. For very small companies with one owner and a handful of younger employees, the business owner generally receives a high percentage of the benefits. In the public sector, defined benefit plans usually require employee contributions.

Over time, these plans may face deficits or surpluses between the money currently in their plans and the total amount of their pension obligations. Contributions may be made by the employee, the employer, or both. In many defined benefit plans the employer bears the investment risk and can benefit from surpluses.

Personal pensions

Who might consider setting up a personal pension?

• the self-employed

• someone without a workplace pension

• someone who lives off their partner’s earnings but wants their own pension

• or someone who wants to make additional pension provisions

What is available and what can i do?

1. personal pension plan?

2. stakeholder pension?

3. SIPP?

4. Can I pay into both a workplace pension and a personal pension?

5. Can I take contribution holidays?

Personal pension plans

A personal pension is any pension scheme you can join yourself that is not a workplace pension (nor the state pension). However, the term can be a little confusing, as there are three main types of personal pension – one of which is simply called a ‘personal pension scheme’!

The three types are:

• Personal pension schemes

• Stakeholder pension schemes

• Self-invested personal pension plans (SIPPs)

The one thing all of these pensions have in common is that they are defined contribution schemes, otherwise known as money purchase schemes. This means you save up a pot of money which is invested in a fund, and which you can access from the age of 55 onward.

There are however some important differences between these types of scheme, which you should take into account when choosing which one might be for you.

What is a personal pension plan?

A personal pension plan is a pension that you set up yourself with the pension provider (usually an insurance company). You can have a personal pension whether or not you work, and other people can contribute to it. For example, if your spouse is the sole earner in your household but you want to have your own pension, you can set up a personal pension for your spouse to pay into.

If you are employed, you can request that your employer pays into your personal pension instead of your workplace pension. You may prefer this if you move jobs, or your act as a contractor or freelancer regularly and don’t want to keep joining different pension schemes.

The money you contribute to a personal pension can be invested in a wide range of assets and funds, just like a workplace pension. This should generate growth over time, building up a pot of money that you can access from the age of 55. 

A personal pension scheme will charge you an annual fee, usually a percentage of your pension pot (which is taken automatically). Fees are often a bit higher than those for workplace pensions but are typically around 1.5% of the value of the fund sometimes slightly higher.

As with all defined contribution schemes, the value of the scheme at retirement will depend on how much you have contributed and the investment growth on those contributions.

What is a stakeholder pension?

A stakeholder pension is similar in most respects to a standard personal pension. However, there are some key differences.

Differences between a personal pension and a stakeholder pension

• A stakeholder pension may have lower annual fees than a personal pension, as these are limited by law to 1.5 percent of pot size for the first 10 years, and 1 per cent after that. Personal pension fees may be higher.

• A stakeholder pension may allow a lower minimum contribution than an ordinary personal pension. By law, the stakeholder pension minimum contribution is just £20 a month.

• A stakeholder pension may offer a narrower range of funds for investing your contributions. This might result in lower growth, but this won’t necessarily be the case.

What is a group stakeholder pension?

Group stakeholder pensions used to be a common kind of workplace pension scheme, and some people still have them. If you are a member of a group stakeholder pension you can carry on contributing to it until you leave that employer, after which time it will become paid up.

What is a self-invested personal pension (SIPP)?

A SIPP is the most flexible kind of personal pension, in that it lets you choose the investments that make up the fund. You can choose from a wide range of asset classes  including equities, investment trusts, commercial properties and government securities. This can make it an attractive option for those who like to take a more active role in investment. You can also appoint a fund manager or financial adviser to handle the investment strategy for you. SIPPs have the potential for higher risk, but also higher levels of growth. They may involve higher management charges too.

Can I pay into a personal pension and a workplace pension at the same time?

You can be a member of any kind of personal pension scheme at the same time as belonging to a workplace pension scheme, and you can pay into both simultaneously if you wish. However, whether or not there is any benefit in doing so will depend on your circumstances. Bear in mind:

• Although there is no limit to the number of pension schemes you can contribute to, there is a limit to the amounts you can save into pensions each year (the annual allowance) and overall (the lifetime allowance). Having more pensions won’t change this. The current annual allowance is £40,000 but this can be different in certain circumstances.

• You’ll get employer contributions on your workplace pension, but not on your personal pension (unless you’re using it instead of your workplace pension, and your employer has agreed).

There are however some reasons why you might want a personal pension in addition to a workplace pension. For example:

• Your workplace pension is a final salary scheme, and does not allow for additional contributions. You might therefore want a personal pension as well to boost your retirement income

• You want to vary your pension contributions from month to month, so you pay a small regular amount into your workplace pension, and a varying amount into your personal pension

Can I take a break from contributing to a personal pension?

With a personal pension, stakeholder pension or SIPP you can take a contribution holiday at any time without any penalty, and restart your contributions when you are able to. This makes them particularly useful for freelancers, contractors and anyone else whose income may fluctuate throughout the year.

Defined contribution schemes

Defined contribution (DC) schemes are occupational pension schemes where your own contributions and your employer’s contributions are both invested and the proceeds used to buy a pension and/or other benefits at retirement. The value of the ultimate benefits payable from the DC scheme depends on the amount of contributions paid, the investment return achieved less any fees and charges, and the cost of buying the benefits.

A DC scheme has a set contribution for the employee and a set contribution for the employer. For example, in some DC schemes, the employer and the employee each contribute 5% of the member's earnings, or 10% in total.

Some DC schemes allow members to choose the level of contribution they wish to pay, with a related employer contribution.  Contributions are invested on behalf of each scheme member.

The retirement benefits for each member depends on how much money has been built up by the member's retirement date and so it is not possible to know in advance what pension benefits a member will receive.

Qualifying recognised overseas pension schemes (QROPs)

‘QROPS’ stands for ‘qualifying recognised overseas pension scheme’. A QROPS is an overseas pension scheme that HM Revenue & Customs (HMRC) recognises as eligible to receive transfers from registered pension schemes in the UK. To qualify as a QROPS the scheme must meet the requirements set by UK tax law, such as being available to residents in that country and not being accessible before age 55 unless under special circumstances. To check if a pension is a QROPS you can check the list of schemes that have told HM Revenue and Customs (HMRC) that they meet the conditions to be a recognised overseas pension scheme (ROPS).

Why might you consider having a QROPS?

If you live overseas or are thinking of moving abroad then you may consider transferring to a QROPS.  You may want your pensions to be in the country that you retire to so you are not receiving income in pounds and spending in a different currency, as exchange rates can fluctuate.  You may also find it easier to keep track of tax and regulation changes if they happen in the country that you reside. You may be working outside of the UK for an employer that offers a QROPS and you like the benefits offered. In all cases it is recommended that you should take regulated financial advice before transferring to a QROPS and you should consider any guarantees or other benefits that you might lose by doing so. Standards of advice can vary in different countries, so make sure you are confident of the professional standing, qualifications and experience of any adviser that you talk to. Please be aware that transfers to QROPS can be subject to a number of tax charges as listed in the next sections. 

When does the 25% overseas transfer tax charge apply?

From 9th March 2017, transfers to QROPS attract a 25% tax charge but there are exceptions. You will still be able to make a transfer tax free if you are transferring to a qualifying recognised overseas pension scheme (QROPS) and formally requested your transfer before 9 March 2017 or one of the following apply:  you are resident in the country where the QROPS receiving your transfer is based you are resident in a country in the European Economic Area (EEA) and the QROPS you are transferring to is based in another EEA country the QROPS you are transferring to is an occupational pension scheme and you are an employee of a sponsoring employer under the scheme  the QROPS you are transferring to is an overseas public service scheme and you are employed by an employer that participates in that scheme the QROPS you are transferring to is a pension scheme of an international organisation and you are employed by that international organisation If the scheme you are transferring out of does not receive the correct paperwork then they are required to charge the 25% on transfer regardless and you will have to apply for a refund via your scheme at a later date. If you are exempt from the charge on transfer but then your circumstances change within 5 years such as moving to another country or moving your QROPS to another country then you may have to pay the 25% tax charge at that point.

QROPS and the Lifetime Allowance

There is a lifetime allowance of £1 Million that you can have in pension savings in the UK unless you have one of the forms of protection in place. If you are under 75 and transfer out of UK registered pensions into a QROPS the value of the transfer will be tested against the lifetime allowance and if it is in excess of your unused allowance, this could result in a tax charge of 25% on the excess. Conversely, if you are under 75 and transferring into a UK registered pension from a QROPS this will usually result in an enhancement to your lifetime allowance. If either of these situations would apply to you, we recommend that you speak to a regulated financial adviser.

What happens if I transfer to an overseas scheme that is not a QROPS?

If you transfer to an overseas pension and it is not a QROPS then usually you will be classified as making an unauthorised payment from your pension which could result in an unauthorised tax charge of 55% with the possibility of additional penalties. Such a transfer is also unlikely to be regulated and is likely to leave you without any recourse to compensation. You may also find yourself in investments that are not diversified or not suitable to your attitude to risk. In short – the worst that could happen is that you lose all of your money and still find yourself with a tax charge to pay. Be aware of scams, don’t act on the basis of an unsolicited contact and always deal with a regulated financial adviser. If you are contacted out of the blue and suspect a scam, contact Action Fraud http://www.actionfraud.police.uk/

Am I free of UK rules and taxes on my pensions if I transfer?

On transfer your QROPS will have a 10 year reporting requirement to HMRC so that if you breach the rules of a QROPS such as releasing funds before age 55 you could still be subject to a tax charge of 55% plus penalties. For those that have transferred to QROPS before 6th April 2017 you also have to be resident outside of the UK for 5 consecutive tax years by the time you come to retire or take benefits. The period of nonUK residence was extended to 10 consecutive tax years for those that transfer on or after 6th April 2017. UK tax rules can apply for the 5 full tax years after you have transferred to a QROPS regardless of how long you have been non-resident. If you are a UK resident when you take benefits from your QROPS this is likely to be subject to UK income tax. If you are resident abroad you will also need to check the tax rules for that country and the country where your QROPS is based. Before you transfer check what tax you will pay on the pension benefits.

Pension Freedoms and QROPS

Whilst pension freedoms were introduced for defined contribution pensions in the UK, QROPS remained subject to a test that 70% of the fund had to be used to provide income for the rest of your life. This test has now been removed for all QROPS* as of April 2017, and you are allowed to have the same options as members of UK registered pensions. There is also a retirement age test of 55 which has now been modified. The new regulations allow for the following payments before age 55: • a serious ill-health lump sum • a short service refund lump sum • a refund of excess contribution lump sum (where you pay too much into your pot by mistake) • a winding-up lump sum (where you have a small pot and the scheme is wound up) *Including international organisations such as the UN and the EU pension schemes.

Take a pause before transferring

If you move abroad, you do not have to transfer your UK pension pot. You can choose to leave it in the UK and then draw benefits from the UK. Currency risk and exchange commission can be managed by setting up a foreign exchange account and transferring money into your local denomination accordingly. If you are transferring your pension you should make sure you understand the features and options in the new plan you are transferring to and how it differs from your current pension. Look out for any charges you may pay on your current pension for transferring, and check what the set-up and ongoing charges are on the new pension. Since 2013 regulated advisers in the UK are not allowed to charge commission and have to be upfront about the fees they will charge you for pensions advice this is not true in every country. Other fees such as trail paying investments and switching charges need to be looked out for. Also find out how the QROPS will invest your money and whether you have any choice in the type of investments. Consider the level of risk you are happy with. You might be worse off if you transfer your pension abroad. You must get regulated financial advice if you want to transfer from most defined benefit pensions and from some defined contribution pension pots which include a guarantee on how much income you will receive. In some cases this may result in you taking regulated advice in both the UK and the country that you are transferring to.

Source: The pension advisory service