Pensions are, of course, designed to enable you to save sufficient money during your working life to provide an income stream for you to live comfortably after you have retired.
There are many different ‘tools’ used to save for retirement and the taxation and investment elements of pensions can appear baffling. We specialise in explaining, recommending and monitoring pensions for you. Below are the most common sources of pension to fund for your retirement.
The Basic State Pension - for people who have paid sufficient National Insurance contributions while at work or have been credited with enough contributions.
Additional State Pension – referred to as the State Second Pension (S2P) but before 6 April 2002, it was known as the State Earnings Related Pension Scheme (SERPS). From 6 April 2002, S2P was reformed to provide a more generous additional State Pension for low and moderate earners, carers and people with a long term illness or disability and is based upon earnings on which standard rate Class 1 National Insurance contributions are paid or treated as having been paid. Additional State Pension is not available in respect of self employed income. From April 2016 both the basic rate pension and additional state pension will be combined to offer a simple single tier flat rate pension.
An Occupational Pension (through an employers pension scheme) – This could be a Final Salary Scheme (sometimes referred to as a Defined Benefit scheme) or a Money Purchase scheme (usually referred to as Defined Contribution). Pensions deriving from Final Salary schemes are usually based on your years of service and final salary multiplied by an accrual rate, commonly 60ths. The benefits from a Money Purchase scheme are based on the amount of contributions paid in and how well the investments in the scheme perform.
Personal Pensions Scheme (including Stakeholder schemes) – these are also Money Purchase schemes and are open to everyone and especially useful if you are self-employed, your employer doesn't yet run a company scheme or just for topping up existing arrangements. From October 2012, the Government introduced reforms and all employers have to offer their employees, who meet certain criteria, automatic enrolment into a workplace pension. Employers can use the Government backed scheme, National Employment Savings Trust (NEST), or offer an alternative ‘Qualifying’ work place pension scheme such as a Group Personal Pension, providing it ‘ticks’ certain boxes. The process is being phased in between 2012 and 2018 depending on the head count of a firm. Employers are required to contribute a minimum of 3% of salary with Employees making a personal contribution of 4% with tax relief of 1% added on top, which again, is being phased in gradually.
Retirement Options – there are now a vast array of different products that may be used at retirement to provide benefits from the traditional form of annuity that provides a regular income stream to Flexi-access drawdown which enables lump sums of benefits to be taken either as a one off payment or over a given number of years. Given the complexity and choice all individuals now have it is important to seek independent financial advice before making any decisions.
State Pensions may not produce the same level of income that you will have been accustomed to whilst working. The full Basic State Pension is only £115.95 per week (2015/2016) for a single person (though you would be able to claim means-tested state benefits if that was your only income). It's important to start thinking early about how best to build up an additional retirement fund. You're never too young to start a pension - the longer you leave it the more you will have to pay in to build up a decent fund in later life.
‘A’ Day (the Appointed day) arrived on 6th April 2006 and brought with it sweeping and radical changes in relation to pension legislation.
This has created a single universal regime that replaced the previous eight tax regimes and the changes affect all savers in occupational and personal pension schemes, employers and financial advisers.
Pension simplification introduced two new controls, the pension Lifetime Allowance (LA) and pension Annual Allowance (AA).
From April 2006, there is now just one set of tax rules for all types of pension, with an individual LA of £1.25 million (2016/2017) and an individual AA of £40,000 (2016/2017). All individuals are able to fund up to these limits with the possibility to also carrying forward unused AA from the previous 3 years. Exceeding the LA or the AA will simply trigger a tax charge.
Other changes included:
- Early retirement age available from age 55
- Full concurrency (i.e. being able to pay into any array of plans you wish), subject to the annual allowance and potential for carry forward
- Wide investment flexibility
- Up to 25% Tax Free Cash
- The ability to commute ‘small’ funds as a one off lump sum as opposed to having to draw a regular income from age 55 (subject to part of the fund being taxed)
- Flexible options at retirement when deciding to take benefits such as Drawdown
- No need to ‘have to’ secure benefits at age 75 via an annuity
In addition another raft of changes introduced in April 2016 also gives individuals further and greater flexibility to access their pension savings from age 55.
The changes also include:
- To increase the flexibility of the income drawdown rules by removing the maximum ‘cap’ on withdrawal and minimum income requirements for all new drawdown funds from 6 April 2015;
- To enable those with ‘capped’ drawdown to convert to a new Flexi-access Drawdown fund once arranged with their scheme
- To enable pension schemes to make payments directly from pension savings with 25 per cent taken tax-free, known as the Uncrystallised Fund Pension Lump Sum (UFPLS) option
- To remove restrictions on lifetime annuity payments;
- To ensure that individuals do not exploit the new system to gain unintended tax advantages by introducing a reduced annual allowance (£10,000 2016/2017) for money purchase savings where the individual has flexibly accessed their savings; and,
- To increase the maximum value and scope of trivial commutation lump sum death benefits.
A pension holder may ask an independent financial adviser for the best advice on which type of pension plan to choose. You can choose the need to pay a large fine for not having any insurance. We as a financial advisers based in Milton Keynes can assist you with the right plan based on your requirements
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION ADVICE.
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