It is vitally important to consider putting aside enough money for your pension. Whether you want to settle down, move away, or travel the world; a well-funded pension will set you up for a retirement that's free of financial difficulty and stress.
Retirement planning can be considered in two stages: pre-retirement/investment, and retirement/disinvestment. As part of the pre-retirement stage, you will need to consider how you will make contributions into a pension pot that is best suited to your goals for retirement.
An independent financial adviser will be able to help you establish a Retirement Plan. This will involve a pension plan but might also include pre-retirement investments and other methods of accruing wealth to better your financial situation later in life.
These investments should be reviewed periodically in conjunction with your retirement income objectives, especially if your attitude to risk starts to influence investment decisions in the final few years before retirement.
Our Portfolio Management Service, delivered by our Independent Financial Advisers, offers a ‘glide path’ to retirement for pension money – this reduces the risk of the portfolio as you approach retirement.
Pre-Retirement/Investment Options for Retirement
There are numerous investment and savings options that can be considered in your retirement plan. Before a retirement-focused investment plan is put in place, it will be necessary to discuss the objective of your retirement.
Then, calculations can be made to work out exactly how much money will need to be saved in order to achieve your personal goals.
A comprehensive analysis of your existing savings, income, and outgoings will then follow in a process known as cash flow modelling. Once your cash flow model is established, your independent financial adviser will work with you to provide a retirement plan involving a pension scheme of your choice, and any other additional investments you wish to make.
In this asset build-up stage, your adviser can recommend ways for you to efficiently save tax, taking into consideration your personal attitude to risk, as well as affordability.
There are a number of different ways you can take a pension as part of your retirement plan. It is recommended that you start regular contributions into whichever pension pot you choose as early as possible into your career to ensure that you’ve amassed a sizeable sum by the time you retire.
There are several different pension options available to you.
*The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Changes to the State Pension
Recently, the State Pension rules changed. Most people will be able to claim the State Pension from the government as a regular payment once they reach the State Pension age. The amount you get is based on your National Insurance record.
The State Pension is a basic provision and is unlikely to be your entire pension. Most people combine it with workplace pension, private pension, and/or additional earnings.
Who does the State Pension apply to?
The rules for the State Pension changed in April 2016, so it’s important to work out whether you’ll be entitled to the new or the old State Pension.
The new State Pension applies to people who will reach the State Pension age on or after the 6 April 2016. This applies to women born on or after 6 April 1953, and men born on or after 6 April 1951.
By October 2020, State retirement age for both men and women will rise to 66.
How does the State Pension work?
The new State Pension is based entirely on your National Insurance records.
If you don’t have a National Insurance record before 6 April 2016, you will need 35 ‘qualifying years’ to be eligible for the maximum State Pension allowance once you reach State Pension age. The minimum number of ‘qualifying years’ necessary to qualify for any State Pension is 10.
In most cases, you’ll find that your National Insurance records will show contributions before 6 April 2016. When you reach State Pension age, your National Insurance Contributions (NICs) from both before and after 6 April 2016 will be taken into account.
You must meet the 10 year ‘qualifying period’ to be eligible for the new State Pension. These can be accumulated before or after 6 April 2016, and they do not have to be consecutive.
Qualifying Years and Qualifying Periods
A qualifying year is any year in which you have paid National Insurance Contributions, either through earnings, National Insurance Credits, self-employment, and voluntary contributions.
The following circumstances explore what is necessary to complete a qualifying year:
- You receive National Insurance credits (such as those receiving Child Benefit for a child under 12, and for those claiming working-age benefits such as Employment and Support Allowance, Jobseeker’s Allowance, and Working Tax Credit)
- You make the voluntary National Insurance contribution of £15 a week (as of 2019/20)
- You are self-employed, and pay £3 a week in Class 2 National Insurance contributions (as of 2019/20)
- You are employed, but earn between £118 and £166 a week (as of 2019/20), meaning your National Insurance Contributions are treated as paid
- You are employed, earning over £166 a week (from one employer), and pay National Insurance contributions (as of 2019/20)
How much will I get if I am eligible for the new State Pension?
Whether or not you get the full new State Pension amount depends on your National Insurance record, as explained above.
If you are eligible, the full new amount of the State Pension is £168.60 a week (as of 2019/20).
Visit www.gov.uk/check-state-pension for more information and to get a State Pension forecast.
Why might I have a gap in my National Insurance record?
Some circumstances cause people to have gaps in their National Insurance record. This may be the case for you if you are missing some qualifying years due to:
- Being self-employed, but not paying National Insurance Contributions as you did not make enough profit
- Not working, as well as not claiming any benefits
- Working, but being on a low income (less than £118 a week as of 2019/20)
- Living abroad
If you have a gap in your National Insurance record, this is not an immediate cause for concern. You may still be able to get the full new State Pension, as qualifying years do not have to be consecutive.
However, substantial gaps in your National Insurance record could influence the amount of State Pension that you will be eligible for. To fill in the gaps, you may be able to pay voluntary National Insurance contributions.
As of 2019/20, you can backdate, or “fill in”, non-qualifying tax years by paying Voluntary National Insurance contributions for the tax years 2007/8 – 2015/16.
Deferring the State Pension
If you decide to defer your State Pension when you reach State Pension age, you may get extra. It will accumulate over time, just as it had been.
However, you will only see a 5.8% increase in your pension for every year you defer.
The State Pension and Self-Employed Workers
Self-employed workers pay Class 2 National Insurance contributions, as long as their profits exceed £6,365 (as of 2019/20). When profits rise above £8,632 (as of 2019/20), self-employed workers must pay both Class 2 and Class 4 National Insurance contributions.
For self-employed workers paying National Insurance contributions after 6 April 2016, contributions will be treated the same way that employees are. This means that they (including any contributions made before 6 April 2016) count towards the new State Pension just as everyone else’s does.
Workplace Pension Schemes
If you are paid a salary by your employer, you will automatically have been enrolled into a workplace pension scheme unless you chose to opt out. Since 2012, the Government has funded workplace pension auto-enrolment in order to ensure every worker is paying into a pension pot that will see them comfortably through retirement.
Workplace pension schemes:
- Save your money;
- Save a contribution from your employer; and,
- Benefit from tax relief from the Government.
This all helps your pension pot grow more quickly. However, many people find that their workplace pension is not enough to see them comfortably through retirement and beyond into later life care.
You can supplement or increase your workplace pension by:
- Increasing how much you contribute to your pension each month
- Making occasional “one-off” lump sum payments
- Delaying the date at which you plan to retire
- Types of Employee Pension Schemes
In the UK, most employees choose either one of two pension schemes. The first is quite often referred to as a “final salary” (or “defined benefit”) scheme, provided through your employer.
Every month during your retirement, you receive an amount relative to how much you earned when you ceased employment – hence the name “final salary”. This pension scheme is also largely dependent on how long you work for an employer.
The second type of scheme is known as a “money purchase” (or “defined contribution”) scheme and involves you saving up yourself, typically aided by contributions from your employer and tax relief from the Government.
In 2015, the Government changed the rules surrounding money purchase pension schemes, meaning you are now able to withdraw lump sums from your “pension pot”.
Money purchase pension schemes are varied and can be organised through your employer or privately. As part of a retirement plan, you can also put money into speculative investments designed to accrue wealth over the years. As with any investment, the value of your pension pot may increase or decrease based on the performance of the underlying asset.
*The fund value may fluctuate and can go down, which may have an impact on the level of pension benefits available.
At Retirement/Disinvestment Options for Retirement
Once you reach retirement, you may wish to take an income in a way that makes the most of your various tax allowances. In 2015, the Government changed the way you can access your pension. This means that you can work with an independent financial adviser to freely design an income model that suits you best.
You may consider lump sum withdrawals, income drawdown, annuities, or leaving your pension invested. Understanding this process will be aided by the expertise provided by an independent financial adviser.
Getting Paid a Pension
When you take your pension pot, the amount you get paid depends on several factors. You will be able to access your money based on:
- How much was paid into the pot
- How well any investments have done
- How you decide to take the money – this may be as a lump sum, as regular income payments, or as a series of smaller sums
Usually, you’ll get 25% of your pension pot tax-free. Additionally, it’s wise to remember that a pension provider will take a percentage of your pension pot as a management fee. Compare providers and their rates to ensure you are maximising your retirement income.
*Pension income could be affected by interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
Before April 2016, most people used their saved pension pot to purchase an “annuity”, otherwise known as an “income for life”. Their money would be given to an insurance company who would then be responsible for paying them an income to last the rest of their lives.
However, annuities do not suit everyone. When you purchase one, your pension pot is handed over in its entirety to the insurance company responsible for paying out your income. Annuities vary, and what happens when you die depends on the type of annuity you have purchased.
For example, if you bought an annuity with a guarantee lasting five years, and you died after two, your income would continue to be paid for the remainder of the guaranteed period. Upon expiration of the guarantee, payments stop, regardless of how much is left in your pension pot.
If you buy an annuity without a guarantee, payments will cease upon death. If you would like to be paid regularly with an annuity, you should look carefully at the types available for purchase to ensure you choose one that suits you best.
Alternatives to Annuities
The new regulations open a wider range of options to those of you who do not wish to purchase an annuity. You can now “draw down” money from your pension pot as income. This provides further security for those of you who wish to leave money for heirs or continue provision for a spouse.
Pension drawdown requires a high level of planning, as any withdrawals over 25% will be taxable as income. However, you can use pension drawdown to invest in assets which may offer you an income, for example in the form of dividends.
In some cases, you may find a combination of annuity and pension drawdown suits you best. Speak to an independent financial adviser to find out how these options could work for you.
We can help by:
- Providing tax efficient saving strategies designed to build up sufficient assets that supplement a comfortable retirement
- Evaluating your personal risk portfolio and affordability limits
- Guiding you through the plethora of disinvestment options available
- Helping you decide which strategy best suits your personal circumstances
- Taking into consideration inflation, taxation, attitude to risk health, and any requirement for dependent benefits
- Utilising cashflow forecasting to establish whether you are likely to have sufficient capital to last you through retirement
- Considering the possibility of receiving an income from your pension fund whilst continuing to work
*The Financial Conduct Authority (FCA) does not regulate taxation advice