Pensions

Pensions FAQS

Below, we have answered some frequently asked questions concerning pensions advice

• Why save into a pension?

  • A pension is a method for saving towards your retirement needs. Contributions to pensions benefit from tax-relief from the Government and are also afforded a variety of favourable tax treatments whilst invested.
  • Many people find that the State Pension is not sufficient to provide them with the income they require in retirement and therefore, further pension saving is of great importance.
  • Contributing to a pension as early as possible gives you the greatest time horizon to benefit from potential investment growth.
  • A financial adviser can help you maximise the opportunities afforded by pension contributions, suggest how funds should be invested, and guide you through your retirement options.

• What are the different types of pensions available?

  In the UK, there are several types of pension options available, which can be broken down into two broad categories:

  • Defined Benefit Pension – this pays a set amount of pension income based on the employee’s salary and years of service.
  • Defined Contribution Pension – the income received, will depend on how much has been paid into the plan and the investment returns.

  Defined contributions pensions come in many forms, from workplace pension plans to personal pension plans and SIPPs.

  All employers must provide a workplace pension. This is known as auto enrolment, which stipulates that your employer must make you a member of a workplace pension scheme and contribute a minimum amount, assuming you meet the lower earnings thresholds. The current minimum total contribution is 8% for most people and your employer must contribute 3% of this amount in most cases.

• What is the State Pension?

  • The State Pension is a regular payment from the Government and is based upon the National Insurance (NI) contributions you have made.
  • To be eligible for the State Pension you must have at least 10 qualifying years and to receive the full State Pension you must have 35 years.
  • The full new State Pension is £203.85 per week.

• What are the contribution rules?

  • A person can receive tax relief on pension contributions of up to 100% of their annual earnings, subject to Annual allowance restrictions.
  • The Annual Allowance restricts the amount a person can pay into a pension during a particular year.
  • The Annual Allowance limit is £60,000 each year with any excess subject to tax at the person’s marginal rate of income tax.
  • This allowance is also tapering (reduced) for people earning more than £260,000, with the minimum annual allowance for those subject to tapering set at £10,000.
  • This allowance applies to all personal contributions, employer contributions, and contributions for the individual paid by a third party, for example, a grandparent.
  • Higher and additional rate taxpayers can reclaim additional tax relief from the Government for any contributions they make (again this is subject rules surrounding the annual allowance).
  • Any unused Annual Allowance can be carried forward for three years. For example, if you have unused Annual Allowances from any of the past three tax years these can be used in addition to your current year Annual Allowance limit, enabling you to increase your maximum tax-relieved pension contributions for the current year.
  • This means someone could potentially subscribe up to £180,000 gross to pensions this tax year by using the current £60,000 annual allowance plus unused allowances of £40,000 for each of the previous three years under pensions carry forward rules, assuming they have sufficient ‘pensionable earnings’.

• What options are available in retirement?

  There are a variety of options available at retirement:

  • Flexible access drawdown – choose to take any amount whenever you like as lump sums, income, or a combination of both.
  • Take some or all of your pension pot as a lump sum.
  • Purchase an annuity – buy a guaranteed regular income for the rest of your life.

  The options available to you will depend on the type of pension plan you have. Seeking financial advice can be vital at this time to ensure all of your options have been considered.

• If I die, what happens to my pension?

  • It is important to check the pension scheme rules with regard to the death benefits attached to the plan. The options could depend on whether you are still in employment or had already started to take retirement benefits.
  • Defined benefit plans usually pay a lump sum, based on a multiple of salary, which is tax free if the person who dies is under 75. This type of pension also typically pays a taxable ‘survivor’s pension’ to the deceased’s spouse, civil partner, or dependent child.
  • A defined contribution plan will normally make the value of your pension pot available to your dependants or other beneficiaries. This could be as a lump sum or a kind of pension, depending on what your pension provides, and payment is usually tax free if the person who dies is under 75.
  • You are often able to nominate who you wish to receive your death benefits.
  • Although not binding, defined contribution pensions allow the scheme administrator to consider your wishes as to where benefits should be paid without unnecessary delay. This will mean that there will be no need to wait for probate to be granted and the benefits payable will not normally form part of your estate for Inheritance Tax purposes.
  • It is important to note that nomination forms can be altered at any time prior to your death and should be revisited regularly.