Introduction To Pension Planning
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Contents
Welcome to…Pension Planning
Introduction to Pensions: 1. Starting a Pension 2. Types of Pensions 3. Choosing a Pension
This brochure has been created for you by Beacon Wealth Management Ltd to help explain the basics of Pensions. Planning for your future financial independence relies on you having a plan that is flexible and suits your needs at all times. You will notice that we have highlighted different pension types available, to help you analyse whether you are on the right path to meet your retirement needs. (There is a wealth of further information available to you about financial planning, which can be found on our website;
4. Set Clear Retirement Goals 5. Check Pension Progress 6. Work Out Pension Income 7. Taking a Cash Lump Sum 8. When To Take A Pension 9. Pension Checklist
www.beaconwealthmanagement.co.uk If you would like a complimentary first meeting, with one of our advisers, you can find their details on page 18 or contact the office direct: T: 01480 869466
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E: info@beaconwealth.co.uk
The content in this publication is for general information and use only and is not intended to address your particular requirements. It should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon the information without receiving appropriate professional advice through examination of their particular situation. We cannot accept responsibility for any lose as a result of acts or omissions taken in respect of any articles. The value of your investments and pensions can go up as well as down. Beacon Wealth Management Ltd
Starting a Pension – The Options Why save into a pension? Whilst seeming complicated, the basic idea of a pension is simple. It is worth understanding their benefits as the State Pension may not be enough to live on, therefore, you will need to save more. 55% of people in the UK are not saving adequately and 20% are not saving anything, to give them the standard of living they hope for when they retire.*
If you fall into this category there are three options available; -
Adjust your expectations downwards of what you will be able to afford in retirement
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Start saving more
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Retire later
*Scottish Widows Pension Report 2013 Beacon Wealth Management Ltd
Advantages of saving into a pension Pensions have a number of important advantages to help make your savings grow more rapidly than might otherwise be the case, as it is basically a long-term savings plan with tax perks. Generally you can access the money in your pension fund from the age of 55. Tax relief top ups If you put money into your personal pension scheme it qualifies for tax relief. This means that as well as the money you put into your pension, some of the money which has already gone to the government as tax, now goes into your pension pot instead - regardless of whether your income is too low to pay tax, the government will still put in tax relief.
Top-ups from employers The government has enforced a new law which means all employers have to start to enrol all their eligible workers (employees) into a qualifying workplace pension scheme, by certain staging dates (deadlines). This is also known as automatic enrolment. Employers under the new law have to contribute to the workers’ pension. If you are a worker and are asked if you would like to join (unless you really cannot afford to contribute), turning down the offer is like turning down a pay rise. If your employer will contribute regardless of whether you do, then you should join the scheme, irrespective of your financial circumstances. Tax-free lump sum When you retire you can take up to a quarter of your pension as a tax-free lump sum. The rest of your savings can be used to provide an income or taken as another lump sum, which is taxable. It is important to be aware of how much you will need to save for retirement beforehand. Beacon Wealth Management Ltd
Starting a Pension early It is a good idea to start your first pension as early as you can to help create a larger fund, without having to overstretch yourself at a later stage. For example, if you think you will need £20,000 a year to retire on, on average; over 40 years (25-65 years old) you would need to save around £200 each month, whereas over 30 years (35-65 years old) you would need to save between £300-£1000 each month into your pension. Payments will also need to be increased each year with inflation, e.g. 4%. There are many different types of pension available to you, as you will see in the following pages, so you need to make sure that you choose the correct pension for your circumstances. If you have a company pension scheme available this is likely to be the best place to start. If, however, you are self-employed or would like to seek other alternative pensions (for potential extra savings), you can either carry out your own research, or contact an independent financial adviser. They will be able to understand your wishes for retirement, and make sure they only offer those options which fit your needs. One of the most important criteria to assess is the risk level of your pensions. You need to make sure that your pension matches with your current risk level, and can be changed to suit you as and when you require.
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If you do not have access to a workplace pension or want to create another for further savings, here are a few important considerations when comparing personal pensions: -
The charges for setting up and running your pension Any rules that apply to the timing or size of your contributions What the investment options for your fund are (see following pages) How easily you can transfer your savings to another scheme later if you want to
Unless you are confident about choosing a plan that is right for you, it i s best to get advice. A professional adviser will look at your particular needs and only recommend funds that are suitable for you.
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Types of Pensions There are many types of pension schemes available, including your state pension, and others including works/company based pensions. State Pension Most people receive a state pension when they reach the state pension age, these are paid by the government. However, you must be eligible, and how much you receive depends on your circumstances.
If you are a member through your workplace, your employer usually deducts your contributions from your salary before being taxed, whilst if you set-up the scheme yourself, you arrange the contributions. Defined Benefit Scheme Also known as Salary-related pension schemes; some employers offer these schemes.
To qualify for the full basic state pension you will need to have completed at least thirty five qualifying years of National Insurance (NI) contributions.
When you retire the scheme will pay you a pension where the benefit is based on rules set out by the scheme. They usually relate to length of service and your salary.
Multi-employer Pension Schemes These schemes work like an occupational scheme, but are provided by an organisation that is not your employer. They are popular in the public sector.
Group Personal Pensions (GPP) The scheme is run by the pension provider that your employer chooses, but your pension is an individual contract between you and the provider.
Defined-Contribution Pensions Defined-contribution builds up a pension fund using yours and your employer’s (if applicable) contributions, plus investment returns and tax relief.
Salary Sacrifice Salary Sacrifice means you agree to exchange or give up part of your salary in order to receive tax or National Insurance savings for both you and your employer and/or receive benefits instead. The benefits could include; pension contributions, child care or a bicycle.
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Auto Enrolment The Government has implemented new regulations where employers have to provide a pension for their workers. The Government has set up its own pension provider; NEST (National Employment Savings Trust) as part of its change. However, it is not the compulsory provider and Employers have until 2018 (depending on their staging date) to meet new government regulations to supply a pension. Pensions for Self-employed If you are self-employed, saving into a pension can be more difficult with no employer contributions and irregular income patterns, but your contributions will be topped up by income tax relief from HM Revenue and Customs (HMRC). Stakeholder Pensions These are a form of defined-contribution personal pension. They have low and flexible minimum contributions, capped charges, and, if you do not want too much choice, a default investment strategy. Whilst some employers offer these, you can also start one yourself.
Personal Pension This is a type of defined-contribution pension. You choose the provider and make arrangements for your contributions to be paid. (These may be offered through your employer and called Group Personal Pensions). Self-Invested Personal Pension (SIPP) This is a ‘wrapper’ that holds investments until you retire and start to draw a pension income. It is a type of personal pension and works in a similar way to standard personal pensions. The main difference is that with a SIPP you have flexibility with the investments you can choose, and they can be managed easily either by yourself or by an investment manager. Pensions work on a defined contribution basis. You build up your pension with contributions from you and your employer and tax relief contributed by the government. When you retire you convert this fund into an income. There are a range of different pensions available, including stakeholder pensions, personal pensions and SIPPs (Self Invested Personal Pensions). Each has their own pros and cons.
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Types of Pensions Compared Pension Type
How It Works
Pro’s
Con’s
State Pension
Everyone is entitled to get one when they retire.
To get the full amount you have to meet a certain amount of National Insurance (NI) contribution qualifying years.
Multi-Employer Pension Scheme
Most people receive a state pension when they reach the state pension age and are paid for by the government, however, you must be eligible and how much you receive depends on your circumstances. These schemes work like an occupational scheme but are provided by an organisation that is not your employer.
Defined Benefit Scheme/ SalaryRelated Pension Scheme
The scheme will pay you a pension based on rules set out by the scheme, usually: - The number of years you have been a member of the scheme (known as pensionable service)
Run by trustees who look after the interests of the scheme members.
If your employer goes bankrupt/dissolves your pension could also disappear.
Your employer contributes to the scheme, and is responsible for ensuring there is enough money at the time you retire to pay your pension.
Only available if your employer chooses this option.
Built up using: - You and your employer’s contributions - Investment returns - Tax relief
Only available if your employer chooses this option.
- Your pensionable earnings (either your salary at retirement (final salary), salary averaged over a career (career average), or some other formula) - The proportion of those earnings you receive as a pension for each year of membership (called the accrual rate) DefinedContribution Pension
Can normally take out a tax free cash lump sum when you retire Group Personal Pensions (GPP) Whilst working the pension is usually invested in stocks and shares, along with other investments, with the aim of growing it over the years before you retire. (Remember investment values go up and down.)
Stakeholder Pensions
When you retire you can take out some of your pension as a cash lump sum, and convert the rest into a retirement income (known as an annuity). The amount you get will depend on a number of factors including; How much you saved For how long How much you take as a cash lump sum Annuity rates at the time you retire Type of income you choose. Or you can take 25% of your pension fund tax free and withdraw the rest as a lump sum which is taxed at marginal rates.
Built up using: - You and your employer’s contributions - Investment returns - Tax relief
Only available if your employer chooses this option.
Can normally take out a tax free cash lump sum when you retire Is an individual contract between you and your provider Low and flexible minimum contributions Capped charges Penalty-free transfers A default investment strategy option, for those who don’t want too much choice Available to individuals as well as companies Your pension provider will claim tax relief at the basic rate and add it to your fund
Personal Pension
Your pension fund could go down.
If you are a higher rate taxpayer, you will need to claim the additional rebate through your tax return.
You choose where you want your contributions to be invested (from a range of funds offered by the provider) Self-Invested Personal Pension (SIPP)
Type of personal pension and works in a similar way to standard personal pensions. When you retire you can take a cash lump sum from your fund and convert the rest into a retirement income. This can be done by income drawdown or purchasing an annuity.
Auto Enrolment Pensions (National Employment Savings Trust)
Work on a defined contribution (or money purchase) basis. When you retire you convert this fund/pension into an income.
Flexibility with the investments; you can choose which can be managed easily either by yourself or by an investment manager You can take a cash lump sum Built up using: - You and your employer’s contribution - Investment returns - Tax relief
Limited flexibility on managing your funds to suit your life, retirement/pension expectations and risk levels. Beacon Wealth Management Ltd
Choosing a Pension Choosing the right pension scheme can make a big difference to the standard of living you enjoy in retirement. There are a few areas to consider when choosing the best possible pension scheme for you – it is not as hard as you might think. Check your employer’s pension scheme If you are an employee and not already part of your workplace pension scheme, your first step should be to see what they are offering.
Be aware of the charges It can be difficult to compare costs of different schemes. Make sure you acquire a breakdown of costs and charges before signing up to a scheme. Shop around If you do not use an independent financial adviser, make sure that you compare all the pensions available to you, and make sure you choose one that reflects your retirement goals.
From 2018 all employers have to have a workplace pension in place which they contribute towards. Signing up to this makes a lot of sense, as you are otherwise effectively turning down additional pay from your employer. (The next question should then be, whether you would require an additional pension scheme with better benefits.)
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Be flexible Consider what pension is right for you. Some personal pensions make you pay in a regular sum every month, whilst others allow you to pay in different amounts each month, and/or a lump sum. Understand how your pension is invested You will probably have a range of investment funds to choose between, but there are a range of factors which will determine how your pension is invested i.e. how close you are to your planned retirement date, and your attitude to financial risk. Knowing these will help you make the right decision. Check to see whether your pensions will be managed on a regular basis, or left sitting in one place. If they are managed regularly, whilst there are no guarantees, you would hope your pension would grow a lot quicker.
You can have more than one pension It is possible to have more than one pension. For example, you may be paying into a workplace pension scheme already, (that your employer also contributes to) but want to increase your pension savings by saving into a separate stakeholder pension, because it may have lower charges or a greater investment choice. Get any advice you need Saving for retirement is crucial, however, there are some very important decisions to make along the way, and it is vital you understand all the options available to you before you start. You can conduct research yourself, or speak to an independent financial adviser who specialises in pensions, who will be able to provide you with a more tailored financial retirement plan.
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Set clear retirement income goals
Check the Progress of your Pension/s
This is a crucial step in the pension planning process as it gives you something to work towards and helps you figure out how much you will need to save now, to live the retirement lifestyle you wish.
It is important to make sure you are on track to meet your retirement goals by reviewing your pension savings, and estimate the income they are likely to generate in retirement – if there is a shortfall in your savings, the earlier you spot it, the easier it will be to resolve.
Be clear about what you need – this does not have to be a daunting experience and the figure you come up with does not have to be set in stone, you just need a ballpark as a starting point.
Estimate your potential sources of retirement income State Pension – Request an estimate of your State Pension either by obtaining a statement or contacting the Pension Service directly. Workplace and Personal Pensions – If you have either of these you will receive annual statements which give an estimate of the monthly retirement income that your pension could generate.
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Other sources of retirement – In addition to your pensions, you may have other savings and investments to help generate an income for retirement e.g. cash deposits, share-based investments and/or property you rent out. Whilst statements and similar documents show you their current value, they will not give you an indication of their income during retirement, which is why you may need to obtain advice from a financial adviser to help work this out. Trace Lost Pension/s To track down lost pensions you have three options: -
Merging Pensions It might be worth merging multiple pensions into one, as it could allow you to: -
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Keep track of and manage your pension/s more easily Save money if you transfer from a higher-cost scheme to a lower-cost one Open up greater choice of investments if consolidating into a flexible pension scheme
(Note: It is important to check that any positives outweigh any potential negatives.)
Contact the pension provider Contact your former employer if it was a workplace pension Contact a financial adviser
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Work out your pension income Your pension provider will make you an offer on how to turn your pension savings into an annuity, or other form of retirement income, but shopping around could result in far larger gains in income. Annuities and other types of pension income Most people need a minimum level of guaranteed income for life, so they use their pension savings to buy a lifetime annuity that will pay them an income until they die, however, there are many different types of annuity available, as well as other pension options. Shopping for an annuity - In most cases this is a one off and irreversible decision, so choosing the right type of annuity and getting the best deal are crucial. Getting the right annuity for you - You do not have to buy your annuity from your pension provider, you can shop around which is known as the open market option. See if your health or lifestyle means that you are eligible for an enhanced annuity – if you suffer from ill health or have an unhealthy lifestyle e.g. smoker, make sure you check as these pay higher rates than a standard annuity.
Steps to choosing the right annuity: -
Decide on the kind of annuity you want Check what your pension provider is offering See if you can find a better rate Choose your annuity or get some help from a financial adviser
Other ways of drawing on your pension savings There are various ways of accessing your pension savings other than buying an annuity. These more flexible arrangements though are generally only suitable for people with larger pension savings, or with other sources of retirement income. Income drawdown - you withdraw an income from your pension savings while the remainder stays invested, so you continue to benefit from any growth. Phased retirement: your pension savings are split into segments, giving you control of which segments you want to turn into an income and when you want to do so. Fund withdrawal: There is no longer a requirement to buy an annuity. This means you can simply drawdown some or your entire fund when you choose. However, the income will be added to other income and taxed at marginal rates.
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Should you take a cash lump sum from your pension?
Decide when to take your pension
You can take a cash lump sum from your pension when you start to take an income from it. In general the lump sum is free of tax, so most people take their full allowance stated by HM Revenue and Customs. However, before you do this you must make sure it makes the most financial sense for your circumstances.
You can take many pensions early or late, the key is to decide what is best for you.
Consider what you would do with the lump sum - Taking a cash lump sum for many people offers a great opportunity to help put their financial affairs in order before they retire e.g. they may use it to help pay off their mortgage or other debts, which could reduce the amount of required income in retirement. Other people invest the money so that it grows/generates a separate income to supplement their pension. However, the lump sum can be used on whatever you wish e.g. holiday, new car or home improvements. There are no set rules of what you should do when it comes to taking your tax free lump sum, however a financial adviser would be able to help identify the best options available to you ensuring you make the most of the money.
Are your savings on track? The key part in deciding whether to take your pension income early or late is to assess whether your pensions are on track to provide the retirement income you will need.
Pension Checklist Step 1 – Estimate your required pension income Step 2 – Write down the key information: -
Date the pension becomes payable Maximum tax free cash lump sum you can take from your pension Likely monthly income (required) What the monthly income would reduce to if you took the maximum tax-free lump sum Whether income should be from an annuity
Step 3 – Decide how to take your pension income -
What kind of pension income is right for you Should you take a tax-free cash lump sum Shop around for the best option
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About Us
Meet The Team Tony Larkins APFS Chartered & Certified Financial Planner. (Managing Director) Specialising in personal and corporate financial planning as well as Pensions and Investments tlarkins@beaconwealth.co.uk Adrian Banks Dip.PFS, Cert CII (ER & MP) SOLLA & Independent Financial Adviser
Chris Wills Dip.CII Independent Financial Adviser ..
Specialising in long term care and financial planning for later life clients
Specialising in financial planning ..
abanks@beaconwealth.co.uk
cwills@beaconwealth.co.uk
Martin Eaton BSc, CEFA, CeMAP Independent Mortgage and General Insurance Adviser
Mark Graddage Cert PFS, Cert CII (MP) Business Support Manager ………………………….
Specialising in mortgage and general insurance
Specialising in mortgage and general insurance
meaton@beaconwealth.co.uk
mgraddage@beaconwealth.co.uk
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Beacon Wealth Management Ltd Chartered Financial Planners The Old Chapel Thrapston Road Kimbolton Cambridgeshire PE28 0HW T: 01480 869466 F: 01480 869477 info@beaconwealth.co.uk www.beaconwealthmanagement.co.uk
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