Retirement Planning

There has never been a better time to be thinking about your pension. The freedoms announced in the 2014 Budget have afforded savers more flexibility than ever, so it’s important to understand the options available to you to ensure your savings work as hard for you as you have for them.

Despite all the changes, pensions still represent one of the most tax-efficient ways for most people to save for retirement.

What is a Pension?

At its most basic, a pension is simply a savings scheme that offers very attractive tax benefits until at least 55. The money in your plan is invested and benefits from tax efficient growth.

The Basic State Pension

The Basic State Pension officially came into being as part of the National Insurance Act of 1946 and is designed to provide a minimum amount of income during retirement. On top of this, if you contributed to the State Earnings-Related Pensions Scheme (SERPS) – or, more recently, to the State Second Pension (S2P) – you may also receive an earnings-related top-up to the state pension. The amount you receive depends on how much you earned and how much you contributed. However, these payments alone will not facilitate a luxurious retirement. For this reason – and because the UK’s increasingly ageing population means the Government is finding it harder and harder to meet even these levels of payment – we are being encouraged to make additional investments towards our own retirement.

An Occupational Pension

An occupational pension is a scheme set up and run for company employees, into which your employer may make some or all of the contributions on your behalf. These could be ‘defined benefit’ schemes (also known as ‘final salary’ schemes) in which the amount you receive depends on the number of years’ service you gave to the company. Alternatively – and these days more likely – they will be ‘defined contribution’ schemes, in which you and/or your employer will make a fixed level of contribution and the final value will depend on how well (or badly) the underlying investments have performed. Thanks to volatile stockmarkets and additional regulation, the days of final salary pension schemes are generally considered to be all but over – apart from some lucky souls in the public sector or those with unchangeable employment contracts in the private sector.

Personal pensions are schemes organised by the individual for the benefit of the individual. It does not matter who you work for, how long you work for them or how much you earn – you decide how much to contribute (subject to an annual contribution limit) and you decide where the money is invested. The more you put in, the more money you have to invest for your future – and the better your underlying investments perform, the higher that value will be.

There are three basic types of personal pension:

Stakeholder Pensions

The simplest pensions, these are designed to encourage lower earners to save for their future. As they are subject to restrictions on charging, they can be a cheap and efficient way to start saving. Because of the cost limits, the range of investments might be restricted, as may some of the additional options, but you will usually find index tracker-type funds and multi-asset managed funds that will suit most people’s basic needs.

Individual Personal Pensions

These pensions offer access to a range of different funds. They may have additional benefits that will make them easier for you to manage if you are looking for something beyond a basic managed or tracker fund, or to switch around different types of investment. They are not subject to the same charging restrictions as stakeholder pensions, so the fund choice can be wider. They should suit most pension requirements for most people.

Self-Invested Personal Pensions

These are the most sophisticated personal pensions and allow a huge amount of investment flexibility if you are very active in your investment allocation or adventurous in your choice. SIPPs allow investors to access funds, shares, bonds, gilts, property and cash – and occasionally more complex investments as well. They therefore allow you to build a portfolio specifically tailored to your needs and to make adjustments to that portfolio whenever and however you like. As a result, compared with the other choices mentioned above, SIPPs have proved relatively expensive. In some cases, however, charges have reduced and a new generation of ‘low-cost’ SIPPS have emerged. These offer the same switching and management flexibility but do not offer quite the same level of access to the more esoteric investments. However, as with any product in any industry, you pay for the bells and whistles. So, if you do not need them or do not have the time or experience to take proper advantage of them, you might be wasting your money by paying for such a product. As ever, if you are in doubt about anything, you should seek professional advice.

What you do with your pension pot is up to you but the significance of your decisions should not be underestimated. That’s why we suggest you seek advice from a suitably qualified financial adviser.

Your options

Once you reach the minimum pension age, normally 55, you’ll be able to

leave your pension fund invested;
enter drawdown, thereby taking some of your money whilst leaving the rest where it is;
withdraw cash in one or a number of lump sums;
purchase an annuity;
go with a combination of all of the above;
or take your entire pension pot in one go.

When taking an income from your pension in any way, the first 25% will normally be tax free with the remainder being taxed as income. Pension taxation can be complicated, so we recommend that you seek professional advice for clarification of how it affects you and your particular set of circumstances.

Pensions

Leave your pension fund invested

There is no need to rush into a decision even though the changes to regulation have made it easier to access your pension. By leaving your fund where it is, you’ll give your savings a chance to grow largely free of tax.

Enter drawdown

From April 2015, some restrictions on accessing pension funds were lifted. Flexi-access drawdown allows you to take any amount to provide an income that suits your requirements, at monthly, quarterly, half-yearly or annual intervals that can be varied on your instruction. Whilst in drawdown, your pension funds remain invested and can continue to grow largely tax free.

Clients already in capped drawdown can choose to convert to flexi-access at any point or remain in capped drawdown.

Take an uncrystallised funds pension lump sum

In addition to drawdown, you can take lump sum payments from your pension called Uncrystallised Funds Pension Lump Sums. As the name suggests, this allows you to take any number of lump sums (assuming you have sufficient funds built up) without crystallising the rest of your funds. You can even choose to take your whole pot in one go. It’s worth noting though that any growth of your pot once it’s left the pension environment will be subject to additional tax.

Purchase an annuity

By passing your pension pot to an annuity provider, you’ll be able to guarantee a set income for the rest of your life. Annuities are generally fixed so you won’t be able to vary what you receive to suit your circumstances once you’ve made the agreement.

A combination of the above options

You could opt for a combination of the above should it suit your risk appetite, tax, growth and income requirements.

Points for consideration

We strongly recommend that you seek advice from a suitably qualified financial adviser before making any decisions about your pension.

Should you choose to take an income through drawdown or an uncrystallised funds pension lump sum, you need to bear in mind the sustainability of your chosen income method. Changes in circumstances, taxation, the performance of your underlying investments and the length of time that you live in retirement will all have an effect on the income available from your pension.