What is a pension plan and how would it work for you?
There are many types of pensions depending on the type of policy you have, you, your employer, your spouse or even children can all contribute to it. You will also receive benefits from the government in a form of “tax relief”. The pension pot will include any capital growth earned from the investments within the plan depending on how the scheme was set up.
Pension pots do not include your “State Pension” as this is provided by the government.
You can contribute to as many pensions as you like this will depend on what you can afford and how much you would like to put aside for when you are older. There are however restrictions each tax year on pension contributions as well as over your lifetime.
A pension is considered as a long term savings plan where you would save a portion of your income regularly over your working life to provide you with an income later in life.
Pension schemes are made up of many types some run by employers others you can setup yourself.
In 2015 some of these pensions became more flexible providing early access to some of the benefits when you reached the age of 55, taking as little or as much as you wished, when ever you liked. With this type of flexibility many advisers would recommend cation as there are tax’s that you should be aware of before making any withdrawal from a pension.
It is important to understand how saving for a pension affects your income as you will be giving up disposable income now in exchange for greater financial security later in life. Budgeting is a key component to effectively planning your pension, helping to forecast what income you need and want in retirement.
As you get older you tend to start to work less but would still
need to receive an income to live on. The earlier you start
planning for this, the more potential there is to save a larger
fund for a better lifestyle in retirement.
An advantage comes in the form of tax relief on the payments
you make to your pension pot. Contributions of 20% are added
by the government up to a certain limit. For higher earners
additional savings can be claimed via a tax return form.
With workplace pensions employers are legally obliged to
contribute to your pot and this also receives government tax
relief.
Pension investments are free from income tax and capital gains
tax. No tax will be paid on dividends from shares or capital gains
tax on investment profits. You will however need to consider tax
implications when you start to withdraw from your pension plans.
Explaining the three main
types of pensions in the UK
Defined contributions
pension
- Also known as
“money purchase”
pensions. This can be a
personal pension
arranged by you or an
employer. Money paid in
is invested, the size of the
pension will depend on
how much was invested
and the level of growth
from the investments.
Defined benefit pension
- Also known as “final
salary” or “career average“
pensions. Arranged by
your employer the
pension you receive
depends on the amount
you earn, the length of
time you have paid into it
and the terms of the
individual pension
scheme. These schemes
guarantee a certain
amount for you to receive
each year when you retire.
State Pension
- A pension
you receive from the
government when
reaching state pension
age. The amount you
receive is based on
National Insurance
contributions. At present
the maximum you can
receive is £164.45 per
week, changes can be
checked by visiting
www.gov.uk
How are each of the pension
options taxed?
- Leaving your pot untouched no tax is applied.
- Guaranteed income (Annuity) 25% tax free of your pot, then taxed on income from the annuity
- Take cash lump sum 25% tax free - 75% taxed of amount you take.
- Take whole pot 25% tax free - 75% taxed on the whole pot.
- Adjustable income 25% tax free before investing adjustable income, taxed on income you get from your investment.
- It is possible to create a mixed solution suited to your needs.
A life time allowance puts a limit on the pension
benefits you can draw from without having to pay
tax charges.
For 2019-20 the Lifetime allowance is £1,055,000.
A tax of 25% would be charged above this limit if
paid as income or 55% if this is paid as a lump
When taking money from your
pensions 25% is tax free and you
would pay 75% on the remaining
amount. This does not use any of
your “Personal Allowance” at
present this is £12,500 per annum.
The tax you pay will depend on
your total income for the year and
your tax rate.
Two ways you can take your taxfree
amount either as a lump sum
or in smaller chunks. You must
either then buy an annuity
guaranteed income, get an
adjustable income flexi-access
drawdown, or take the whole pot
as cash.
Transferring your pension
Factors that are considered when looking at a possible
pension transfer:
- Your current provider does not offer options to contribute or the options required to grow a plan.
- You want to combine plans into one simple pot.
- You want to pay less in fees.
- You require earlier access to your pension than the current provider can offer for example ill health.
- You require a higher income return from your pension.
Having financial advice can ultimately help you decide if a transfer is right for you. Regulated advisers are able to run pension forecasts and understand what it is you are trying to achieve. Any fee’s and projections will be mapped out clearly and whole of market searches can be made on your behalf to find the most relevant providers.
Considering Combing
pension pots
You may have worked in
several places or
contributed to lots of
different plans.
Combining policies can
make managing these a
lot easier, reduce costs
and maximise potential
growth.
Transfer Valuations &
Fees
A transfer value is the
worth amount if the
pension was to move.
Fees may apply like an
early exit charge when
transferring a pension.
You may also be giving
up some of the benefits in
a current plan held.
Regulated Pension
Advice
A regulated qualified
financial adviser can help
you ultimately decide what
is right for you. They can
explain any fee’s associated
and search the whole
market ensuring
recommendations made are
in your best interest.
Accessing your pension
Within your pension there will be the certain minimum age you can access your plan in
general this is age 55 however this can vary. When obtaining scheme information this will
be part of the questions made to enable a full analysis of current arrangements.
A guide to our Pension Review
Our initial review begins with an information gathering
exercise where we compile an in depth look into your
need's and requirements this is entirely at our expense.
Our regulated advisers will then evaluate your current
positions and compile a comprehensive report, tailored
to your needs. This will ensure the recommendations are
inline with your attitude to risk as well as achieving
personal goals.
At this stage we would have completed all the necessary
details we require to get you the correct advice. Our
regulated experts will put your needs at the forefront of
our recommendations ensuring they have tailored them
to achieve all goals and future projections. Any costs
involved to proceed will be clearly explained, it is then
entirely down to you to ultimately decide whether you
wish to proceed with this recommendation.
Arrange a Consultation
The first meeting is always
at our expense so you can
be comfortable in knowing
that it will cost you nothing
to see if our services are
right for you.
Our Financial Experts
Our team of advisers are
highly trained and qualified,
with specialties in all
different fields of financial
planning particularly in
pensions and investments.
High Expectations
Strive for the top and you’ll
reach it. That’s our motto,
and our experience. We’ll
work our hardest so that
your most challenging goals
are met every time.
