What is a pension?
In simple terms, a pension scheme is just a type of savings plan to help you save money for later life. It also has favourable tax treatment compared to other forms of savings.
What are the different types of pensions?
Along with the State Pension from the government, there are 2 main types of pension:
- defined contribution – based on how much money has been paid into your pension pot
- defined benefit (final salary or career average) – based on your salary and how long you’ve worked for your employer
These are sometimes known as ‘money purchase’ pensions. They can be personal pensions arranged by you or workplace pensions arranged by your employer.
The money paid in by you or your employer is put into investments by your pension provider. The amount you get when you come to take your pot depends on how much was paid in, charges deducted by the provider and how well the investments have done.
The value of your pot can go up or down depending on your investments.
With defined contribution pensions you decide how to take your money out.
Types of Defined Contribution Pension
- Executive pension plan
- Group personal pension
- Master trust pension (eg NEST, NOW pension, the People’s Pension)
- SIPP (Self Invested Personal Pension)
- SSAS (Small Self-Administered Schemes)
- Stakeholder pension
Defined Benefit (final salary or career average)
These are sometimes known as ‘final salary’ or ‘career average’ pensions. Defined benefit pensions are nearly always workplace pensions arranged by your employer.
How much you get depends on your salary, how long you’ve worked for your employer and a calculation made under the rules of your pension scheme.
Your provider guarantees a certain amount each year when you retire.
The State Pension
The pension you get from the government is called the State Pension. You get it when you reach State Pension age.
You don’t normally get it automatically – you have to claim the State Pension.
The most you can currently get from the basic State Pension is £122.30 per week.
If you reached State Pension age on or after 6 April 2016 you’ll get the new State Pension.
What is a SIPP?
Self-invested Personal Pensions (SIPPs) are a type of personal pension. They are an individual contract between you and the pension provider. However, SIPPs offer much wider investment powers than are generally available for personal pensions and group personal pensions.
SIPPs are flexible and are portable. If you change jobs, or stop working, you can continue contributing to the scheme, and, if you join a new employer, they may also decide to contribute to it. If you do change jobs, you should let the pension provider know to ensure that your contributions continue (especially if your old employer was paying contributions on your behalf).
Since 2006, there has been no restriction on the number of different pension schemes that you can belong to, although there are limits on the total amounts that can be contributed across all schemes each year if you are to receive tax relief on contributions.
Under current legislation, you can commence drawing retirement benefits from the age of 55 and you don’t have to stop work to draw benefits.
Up to 25% (subject to the Lifetime Allowance limit) of your accumulated fund can be withdrawn as a tax-free cash lump sum with the balance used to provide an income. This is called the ‘Pension Commencement Lump Sum’.
There are different ways that this income in retirement can be provided. These include taking out an annuity and income drawdown.
What is the Lifetime Allowance?
The Lifetime Allowance is a limit to the amount of pension benefit (whether lump sums or retirement income), that can be drawn without triggering an additional tax charge.
Since 6th April 2016, the Lifetime Allowance is £1 million, having been reduced (on several occasions) from a peak of £1.8 million in 2010.
Are you restricted or independent?
Advisability Limited is an Appointed Representative of InterestMe Financial Planning Limited. InterestMe Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA) under reference number 542680.
We offer restricted advice model. This means that rather than look at the entire market, we recommend products and services to suit your needs from a limited range of carefully selected firms.
Why should I consider transferring my pension?
Control – You’ll have everything in one place making it easy to review and track the performance of your pension.
Value – Our review will highlight the charges you’re paying now to your existing provider and let you know if you can benefit from moving to a new style plan. Not only that, the review provides you with a projection of how much more your pension fund could grow in the upcoming years.
Why do I need to review my pension?
Alongside the prudence of reviewing the fee and performance competitiveness of your pension, it’s important the investments chosen are appropriate for the amount of risk you’re prepared to take with your money – remember, investments can go up or down and an individual’s risk tolerance and financial position can change over time. Our financial advisors will make sure your pension investment accurately reflects your current attitude and tolerance to risk, as well as your up-to-date financial position.
Am I under any obligation?
Throughout the entire service you are under no obligation whatsoever. We are not here to sell or push you into a decision; we are here to provide you with options, so you can make your own decision, in your own time.
How are you regulated?
Advisability Limited is an Appointed Representative of InterestMe Financial Planning Limited. InterestMe Financial Planning Limited is authorised and regulated by the Financial Conduct Authority (FCA) under reference number 542680. You can check this on the FCA’s register by visiting www.fca.org.uk/register or by contacting the FCA on 0800 111 6768.
Do I have any protection if my product provider enters into financial trouble?
All the providers we use are protected by the Financial Services Compensation Scheme (FSCS). The compensation depends on the type of business and the circumstances of the claim. Most types of investment business are covered up to a maximum limit of £50,000.
Further information can be found at http://www.fscs.org.uk/
What is the FSCS?
FSCS is the compensation scheme for customers of UK authorised financial services firms. It can compensate customers if a firm has stopped trading or does not have enough assets to pay claims made against it.
The Scheme was set up under the Financial Services and Markets Act 2000 and became active on 1 December 2001. We still cover claims from before this date.
FSCS is free to consumers and is independent of government and the financial industry.
Further information can be found at http://www.fscs.org.uk/
What is the Annual Allowance?
The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It’s based on your earnings for the year and is capped at £40,000.
What is Carry Forward?
Carry Forward allows you to make use of any Annual Allowance that has not been used during the three previous tax years (Provided that you were a member of a registered pension scheme during those tax years).
Effectively, you have the ability to make contributions in excess of the current years’ annual allowance without having to pay a tax charge on the excess, subject to sufficient relevant earnings of course.
Carry forward may be more significant to those with variable earnings such as the self-employed or someone looking to make a large one-off contribution (perhaps due to an inheritance for example).
What happens to my pension if I die?
If you were to die, your pension(s) may provide benefits to your financial dependants. If you don’t have any dependants, or would prefer benefits to be paid to someone else, most pension options allow anyone to inherit your pension.
It is important to make sure your pension provider(s) has up-to-date details for your beneficiaries.
The benefits that will be paid out depend on the type(s) of pension scheme that you belong to, whether you’re an active member, the type of beneficiary and whether you have commenced drawing retirement benefits.
What happens to my pension if I get divorced (dissolution)?
In the event of divorce or dissolution, there are three approaches to the splitting of pension assets:
-Offsetting – pensions are kept by the individuals, but would be taken into account in division of other assets, i.e. partner with less pension savings would receive higher proportion of remaining assets. Allows for a clean break at the time of the divorce.
-Earmarking – pensions are divided along with other assets, however they will only be transferred at the time of retirement or death. This means that the partner taking a proportion of their ex-spouse’s pension would have no control over investment, decision-making, etc.
-Pension sharing – allows one partner to take a share of the other’s pension at the time of the divorce. This allows for an immediate clean break.
The decisions of ‘how much’ and ‘what function’ are made by a judge as part of the divorce proceedings and those decisions are then legally binding on the pension providers.
What is a Letter of Authority (LOA)?
In order to accurately assess your current pension position we need to have your permission to contact your current providers. This is done via a Letter of Authority (LOA). An LOA is written authority to delegate certain administrative tasks to a third party (Advisability), meaning the effort is taken out of the process for you.
What is a suitability letter?
A document stating whether the pension (investment) meets the needs and requirements of the client i.e. that it is suitable for the client.
How do you assess my level of risk?
Our Financial Advisors not only assess your level of risk based on their in depth knowledge built up on you, but also on your approach to risk. Rather than just asking you your attitude towards risk (an approach vulnerable to bias), we will ask a specific number of a simple psychometrically designed questions. An approach proven to give more accurate results.
When shouldn’t I transfer my pension?
If you’re in a company defined benefit (DB) pension, it will almost certainly not be worth transferring your pension into a personal scheme. As well as a guaranteed income, DB schemes also offer generous benefits to your spouse or partner once you die. Anyone who is considering transferring this type of pension should always take professional advice from a pension transfer specialist.
Also, if you’re very close to retirement, transferring your pension is unlikely to be suitable for you.
Bringing your pensions together into one plan may not be right for everyone. If we are unable to better your existing product we will inform you.
Do I have to pay you fees?
All consultations with our Financial Advisers are free with no obligation. We are not here to simply sell you financial products and services. Our aim is to help you to benefit from our in-depth knowledge and expertise and we only ever charge for our services when clients accept our advice.
Where can I go for more information?
Pension Wise is a free and impartial government service, providing information on direct contribution (DC) pensions
The Pensions Regulator Glossary
This is a guide to help people understand pension’s terminology in general.