Pensions | Bigmore Associates

Pensions & Retirement Planning

Types of Pension, Pension Benefits, Pension Transfer Advice

First things first, pensions are financial products that are paid into while you’re working, with the aim of providing them money when you retire. Pensions can be created via the workplace, be bought and operated via a provider, or managed personally.

Pension pots grow through the years as more money is invested in them, as interest is paid on the sum, or as stocks, shares and other investments grow in value. Most people in the UK can also receive a State Pension when they’re older, which grows according to how many years a person has paid National Insurance (NI) contributions.

When you reach pensionable age (the age at which you can begin drawing from your pension) then you will have the option to take out the money. This is usually around the age of 55, although the State Pension is given to those who are older.

Laws require all employers to enrol their workers on a workplace pension scheme if they’re aged between 22 and State Pension age, work in the UK, and earn more than £10,000 each year. Also, tax relief is paid on pension contributions, meaning that each contribution is topped up by the government.

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There are a number of different types of pension that you can invest in

Personal pensions

If you have a knowledge of investing, then a personal pension could be a good choice. With these, you set up a pension account with a provider and either choose the investments you’d like to make with your money or pick from a selection of investments chosen by the fund’s operator.

The longer you have a pension set up and pay into it, the more money you’ll have when you retire. This is because the investments in your pension are designed to grow in value over the long term.

Defined benefit pensions

An older type of pension scheme that has fallen out of favour among employers due to its high cost, defined benefit pensions – also known as final salary schemes, see employees pay a portion of their salary into a pension pot while they work.

Depending on the agreement with the company, if you have a defined benefit pension and retire, you’ll receive a portion of your final salary annually until you die. This amount is worked out depending on how many years you worked at the company.

So, for instance, if your employer pledged to pay one sixtieth of your final salary for each year you worked there, and you had 20 years of service, when you retired, you’d be paid a third of your final salary each year until you died.

Defined contribution pensions

The most popular form of pension scheme, and that which the government’s new workplace pension rules are built around, defined contribution schemes see employees pay a portion of their pay into a scheme, which is then matched by their employer and topped up by pension tax relief.

This money is then invested by the operators of the scheme in things like bonds, stocks and shares, with the returns from these investments being added to the pension amount over time.

The State Pension

The State Pension is divided into two categories. If you reached pension age before April 6th 2016, you’ll receive the old State Pension, with the amount given being dependant on how many years you paid NI, up to a maximum of 30 years’ worth.

You may be entitled to the Additional State Pension depending on your National Insurance contributions. There’s no set amount, but the money you receive will depend on the benefits you claimed and how much you earned whilst working.

The new State Pension is for those reaching pension age on or after April 6th 2016. The amount paid again depends on the number of years that you contributed to NI, but the maximum is 35 years’ worth. If you have less than ten years of contributions, you won’t be eligible.

The Additional State Pension is not available if you reached State Pension age on or after 6 April 2016. In effect, the New State Pension is a combination of the State Pension and Additional State Pension.

Both varieties of State Pension increase per year in line with either UK earnings growth, prices growth, or an interest rate of 2.5% – whichever is highest. This is called the triple lock.

When you retire - Pensions Advice

You can choose to receive a pension when you reach a pensionable age, the earliest of which is 55. You will usually have the option of delaying your pension, in return for higher payments later on. Otherwise, it’s either decided when you sign up to a pension provider or when you pass State Pension age. The latter is more difficult to work out, as the government reserves the right to change this age, given that the UK’s population is living far longer than it once did.

When you retire, you can do a number of things with your pension pots. You can firstly take a 25% portion of the money out tax-free, with the rest being left to grow – known as drawdown. You can then take money out of this pot to fund your lifestyle, or use it to buy an annuity (a regular income) – this money is taxed according to your overall income.

Alternatively, you can invest the whole amount in an annuity, with the first 25% of each payment being tax-free, or keep the whole amount invested, with each withdrawal being tax-free at 25%.

Pensions can take a little time to get your head around, but after you do so, you’ll have a far better understanding of your finances during retirement, allowing you to do the things you want to do once you stop working. We offer no-obligation pensioms advice including advice about transferring your pension. Call us now for a no-charge initial consultation.

HOW DO PENSIONS WORK

Pensions are an incredibly important aspect of our finances, responsible for ensuring a good standard of living when we’re older. Unfortunately though the options available, rules present and general nature of the pension system are on the whole rather complex. As a result, many people can forget, or downright refuse to engage at all.

But pensions matter, and it’s important not to let their nature detract from the need to understand and invest in them while you have time.

DRAWING YOUR PENSION

The rules regarding the drawing of your accumulated pension pot has changed dramatically in recent years and there has never been more choice on how and when to take your pension. Whilst flexibility is a welcome benefit it does place more pressure on you to choose appropriately as once the decision has been made to draw your pension in a particular manner it is often irreversible.

We can help guide you through the pros and cons of the different ways to draw your pension whether it is purchasing an annuity, capped or flexible drawdown, how to use your tax free cash, guaranteed annuity rates, death benefits and inflation protection. Our advice is always linked back to your personal circumstances and needs and will consider your attitude to risk, overall financial position, expectations and provision for dependants and loved ones.

PENSION FREEDOM

Pension rules have been regularly changed over the years but in 2015 we saw one the biggest ever overhauls of the system which has led to much more choice for individuals on just when and how they take their benefits. You may now draw out any amount out of your pension at any time over the age of 55 creating a tax efficient savings pot that can meet your changing needs over retirement.

With tax efficient benefits on death and full access to the savings personally pensions have never been so flexible but this flexibility does bring more complexity and therefore even greater need to take advice. How and when your draw your pension is one of the most significant financial decisions most individuals make in their lifetime and it is important to understand all the options and implications of your decision before you draw the pension down.