Frequently asked questions
UK employers now have a legal duty to enrol most employees into a qualifying workplace pension scheme and contribute towards their retirement following changes in the Pensions Act.
Monthly Archives: March 2013
Occupational workplace pensions
“So what do I do with my money?”
There are two main types of occupational workplace pension schemes:
Minimising potential taxes and duties on your death
Immediate access to your pension funds, allowing you to take out what you want, when you want it
As your wealth grows, it is inevitable that your estate becomes more complex. With over 400,000 people now expected to reach age 75 each year [1], more and more people could be faced with a 55 per cent tax charge on any money left in their pension fund when they die.
Income drawdown
When you’re not ready to convert your pension fund into retirement income
If you decide that you’re not ready to convert your pension fund into retirement income by buying a lifetime annuity, but you do need funds, you have a few options. These are often known as income drawdown options.
Gender neutrality
Women could increase their pension income
by over 20 per cent
The new 20 per cent uplift in capped income withdrawals, applicable from the 26 March this year, means that people could start to see the benefit of this uplift from the start of their new income year following this date.
Retirement income guarantee
Additional income protection
If you have a partner or other dependants, such as children, you might want to think about additional retirement income protection. With income protection, your named dependants could get some or all of your retirement income if you die, either as regular payments over a period of time, or as a one-off lump sum.
Different types of annuity
Valuable options that allow you to tailor the income you need
In the UK, there are basically two types of annuity:
• pension annuities (compulsory purchase)
• purchased life annuities (voluntary purchase)
Buying your annuity
An important one-off decision that has long-term consequences if you get it wrong
If you save through a private personal pension, when you approach retirement age you’ll have to decide what to do with the pension fund you have built up. If applicable to you, one option is to buy an annuity. It’s important to find an annuity that suits you and provides the best deal because, after your property, an annuity is probably the biggest purchase you will ever make.
Private personal pensions
To afford the lifestyle you want when you retire, you need to do something about it today
It may be tempting to say, “But retirement is a long way off”, yet it’s never too early to start investing in order to protect your future. To afford the lifestyle you want when you retire, you need to do something about it today. You now have a much greater choice when it comes to how and when to take retirement benefits from pensions since the pension simplification rules were introduced.
UK’s pension tax regime radical overhaul
On April 6, 2006 major changes were introduced to the structure of UK Pension schemes. These changes heralded probably the most radical overhaul of the UK’s Pension tax regime. The new simplified regime was largely a replacement of the past pension framework as opposed to the addition of another layer of legislation.
The most important thing is to plan your retirement funding strategy in advance. Anyone investing in a pension should remember that whilst pensions are extremely tax-efficient, it’s important to regularly review where your money is invested. This becomes more important as you begin to approach retirement when your investment aims may gradually change from growing the value of your pension fund to protecting it.
A private personal or stakeholder pension scheme could be right for you if:
• you want to save money for retirement in addition to your occupational workplace pension
• you’re self-employed, so don’t have access to an occupational workplace pension scheme
• you aren’t working but can afford to pay into a pension
• your employer offers it as an occupational
workplace pension
Personal and stakeholder pensions are ‘defined contribution’ private pensions that you arrange yourself. You contribute money into a pension fund which you use to buy a regular income when you retire. Sometimes employers set up group personal or stakeholder pensions for their employees.
Tax-efficient environment
Personal private pensions grow in a tax-efficient environment. You pay no capital gains tax on any growth and no further UK tax on any income the investments produce, and income from fixed-interest investments and deposits are received gross.
UK investors under age 75 can benefit from up to 50 per cent pension tax relief (2012/13 tax year) and 45 per cent (2013/14 tax year).
The higher your rate of tax, the more tax relief you could receive. Even non earners, including children, and those with an income under £3,600 can benefit, but can only contribute up to £3,600 this tax year.
Basic-rate tax relief of 20 per cent is added automatically. For instance, you contribute £8,000 to your pension and the government adds £2,000, to make a total investment of £10,000.
Higher-rate taxpayers can claim back up to a further 20 per cent through their tax return – another £2,000 in this example. So the cost of a £10,000 contribution is as little as £6,000.
Top-rate taxpayers can claim back up to a further 30 per cent (2012/13 tax year) through their tax return – another £3,000 in this example – so the cost of a £10,000 contribution is as little as £5,000, and 25 per cent (2013/14 tax year).
Annual allowance
The annual allowance (£50,000 in the 2012/13 to 2013/14 tax years) caps the maximum contributions that can be made by anyone (yourself or your employer, for instance) into all your pensions in a tax year. This limit does not apply to consolidating pensions, but includes the value of benefits built up in final salary schemes.
The table shows you the annual allowance for the tax years 2012/13 to 2013/14. Lifetime allowance
The lifetime allowance is the maximum amount of pension benefit you can build up over your life that is available for tax relief. If, when you take your pension benefits, these are worth more than the lifetime allowance there is a tax charge (the lifetime allowance charge) on the excess.
The lifetime allowance charge is a tax charge paid on any excess in the value of your pension benefits over the lifetime allowance limit. The rate depends on how this excess is paid to you. If the amount over the lifetime allowance is paid as:
• lump sum – the rate is 55 per cent
• taxable pension – the rate is 25 per cent
The table shows you the lifetime allowance for the tax years 2012/13 to 2013/14.
Input periods
When you contribute to a private personal pension, your contributions count towards the annual allowance of the tax year in which they are made. For instance, a contribution you make in March 2013 counts towards the 2012/13 tax year. This is not necessarily the case for other pensions. If you have contributed more than £50,000 across the last two tax years, a contribution you make could unknowingly take you over
the annual allowance.
Carry forward
If your total pension contributions for the tax year are more than the annual allowance you may still be able to claim tax relief as you can carry forward any unused allowance from the previous three years to the current tax year. You will only have to pay tax on any amount of pension contributions in excess of the total of the annual allowance for the tax year plus any unused annual allowance you carry forward. These carry forward rules are not being changed. The effect of this is
that for 2014/15 you will be able to carry forward up to
£50,000 unused allowances from each of the tax years
2011/12 through to 2013/14.
When you can receive your pension
The earliest age you can receive a private personal or stakeholder pension is usually 55, depending on your arrangements with the pension provider or pension trust. You don’t have to be retired from work.
The 3 basic steps when arranging your retirement income are:
• decide when you want to retire
• decide how you want to be paid
• shop around for the best deal on a regular payment (buying an ‘annuity’)
Deciding when to retire
Generally, the older you are when you take your pension the higher the payments because your life expectancy is shorter.
Deciding how you want to be paid
When you’re close to retirement you have to decide how you want your pension to be paid. This will depend on the arrangements you have with your pension provider but usually you’ll have the option to take up to 25 per cent of your pension fund money as a tax-free lump sum and the rest as regular payments. These could be monthly, quarterly, half-yearly or annually.
If all your pension funds total £18,000 or less, you can usually take the whole amount as a lump sum. You have to be at least 60 to do this. If your private personal pension or stakeholder pension is less than £2,000 you can usually take it as a cash payment, no matter how much you get from other pensions.
In some cases, when you’re under 75 and are expected to live less than a year, you can take your whole fund as a lump sum. You won’t have to pay tax on it unless your pension funds are worth more than the lifetime allowance.
State Pension
A regular payment from the government that you receive when you reach State Pension age
The basic State Pension is a regular payment from the government that you receive when you reach State Pension age. To receive it you must have paid or been credited with National Insurance contributions.
The most you can currently receive is £107.45 per week
(in 2012 to 2013).
The basic State Pension increases every year by whichever is the highest:
• earnings – the average percentage growth in wages
(in Great Britain)
• prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI)
• 2.5 per cent
Additional State Pension
The Additional State Pension is an extra amount of money that you could receive with your basic State Pension. It’s also based on your National Insurance contributions.
How much you receive depends on your earnings and whether you’ve claimed certain benefits. There is no fixed amount like the basic State Pension. You receive the Additional State Pension automatically, unless you’ve contracted out of it.
The Additional State Pension is paid with your basic State Pension. It normally increases every year by prices – the percentage growth in prices in the UK as measured by the Consumer Prices Index (CPI). There is no fixed amount for the Additional State Pension.
How much you receive depends on:
• how many years of National Insurance contributions
you have
• your earnings
• whether you’ve contracted out of the scheme
Once you’ve reached State Pension age and are claiming the basic State Pension you’ll automatically receive any Additional State Pension you’re eligible for. There is no need to make a separate claim.
You will not receive the Additional State Pension if you’ve contracted out of it. If you only contracted out for certain periods, you’ll receive a reduced amount.
The Additional State Pension is made up of two schemes. You might have contributed to both, depending on how long you’ve been working.
The main difference between the two schemes is that since 2002 you also contribute to the Additional State Pension if you’re claiming certain benefits.
The State Second Pension since 2002
You contribute towards your Additional State
Pension through your National Insurance contributions when you’re:
• employed and earning over the lower earnings limit of £5,564 a year (in 2012 to 2013)
• looking after children under 12 and claiming Child Benefit
caring for a sick or disabled person more than 20 hours a week and claiming Carer’s Credit
• working as a registered foster carer and claiming
Carer’s Credit
• receiving certain other benefits due to illness or disability
You’re not eligible if you’re:
• employed and earning less than £5,564 per year
• self-employed
• unemployed
• in full-time training
Contracting out of the Additional State Pension
You can only contract out if your employer runs a contracted out pension scheme, so you’ll need to check this with them. If you’re a member of a contracted out occupational workplace pension you don’t contribute to the Additional State Pension for the time you belong to the scheme.
This means that when you retire you either don’t receive any Additional State Pension or it might be reduced, depending on how long you contracted out. You and your employer pay lower National Insurance contributions while you contract out. When you retire, you’ll get a pension from your employer’s scheme.
To contract out you must be:
• earning at least the lower earnings limit of £5,564 a year (in 2012 to 2013)
• paying Class 1 National Insurance (or treated as paying them – check with your employer)
Different rules apply if you’re a member of a salary-related pension scheme before 6 April 1997. These rights, known as the ‘Guaranteed Minimum Pension’, can’t be taken before age 65 (men) or 60 (women). The Guaranteed Minimum Pension will continue to be paid at these ages even when the State Pension age rises.
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