“When you retire, it doesn’t matter how much you have earned, only how much you have saved!”
Pensions, investments and general retirement planning is very much our specialist subject. Structuring an effective retirement solution will be one of the most important financial decisions you make. It is therefore essential to get advice from someone who has the required level of expertise and experience.
Not only do we advise individuals and companies we also provide specialist services for solicitors.
In essence, pensions are a simple concept, they are a savings scheme with certain tax advantages designed to provide an income for you when you stop work. This may be provided by your employer, self-funded, or a combination of the two.
The State Pension
The State also assists by providing the basic state pension (£4,953 per annum from April 2009). Whether or not you get this full entitlement depends on your national insurance record. Women also get a credit for the years they received child benefit for any children they were looking after. In addition to this the state also provides an extra top-up amount called the Second State Pension (S2P), previously called SERPS and previous to that the Graduated Pension!
You are able to divert that part of your National Insurance contributions that would normally entitle you to benefits under S2P into your own pension scheme (Some employer's schemes do this automatically). This is called "contracting out". The decision as to whether or not to contract out is a complex one and involves many different factors. The ABI have produced a very helpful
fact sheet that gives a useful background to the decision.
The Government is constantly varying the terms of the state pension entitlement as it battles against the increasing cost of longevity. The state pension is really only set at a level to provide subsistence income and should not be relied upon to provide an adequate income in retirement.
It is important to note that with the state pension there are NO rights, there is NO contract and the money pensioners are paid in the current year is taken from current taxation and national insurance contributions.
Planning For Retirement
Part of the work we are involved in is assisting people in planning for their retirement. This includes making an assessment of the expected income from the various pension schemes they already have (if any), and determining how much will be needed in order to achieve their target retirement income at their target retirement age.
This is much like planning a journey using a map. First of all we need to determine where we are starting from on the map, without this it will be impossible to plan a route effectively! That is why we will need details of your various existing pension schemes. These may be schemes from a previous or current employer where the benefits are based upon your final salary or it may be accumulated funds in an employer’s scheme, or a personally funded pension scheme.
Next we need to determine where you want to get to “on the map”. It is important to have some idea of when you would like to retire and the rough level of income you would like to receive during retirement. We will help you assess this by discussing with you your financial objectives, in the context of your current income and outgoings.
Lastly we need to determine how to get there! For this we will need to advise you on the most appropriate pension “vehicle” and the contributions you will need to make to your existing employer’s scheme or to your own funded pension scheme in order to achieve your target. We will also advise you on the most tax efficient way of making your pension contributions.
The Government has recently relaxed the limits on how much you can pay into a pension scheme and now allows you to make contributions to your own personal scheme alongside an employer’s pension scheme.
You are now allowed to contribute up to 100% of your current earnings up to a maximum of £245,000 (09/10) in each contribution period (normally a year). Even if you have no earnings at all you can still contribute up to £234 per month and the Government will give you a free tax credit topping up the contribution to £300 per month.
There is also a lifetime allowance which determines the maximum your fund can amount to without paying a tax penalty and this is currently £1.75 million (2009/10).
For some, these limits will not be relevant and it will simply be affordability that determines the level of pension contribution, for others careful planning is required in order to avoid any excess tax charges.
The vehicle we recommend for your “travel” to retirement will depend upon your own personal circumstances and how actively involved you wish to be in the investment decisions. This can vary from the “hands-on” self invested personal pension (SIPP) using it to purchase commercial properties, to the simple stakeholder pension scheme. Once again we will assist you in the choice of the most appropriate pension vehicle for you and will assist you in the management of the scheme.
Taking Your Benefits At RetirementUnder the new legislation you are normally able to draw a quarter of your pension fund as, in government speak, a “Pension Commencement Lump Sum” (tax-free cash). It is not always best to draw the tax-free cash especially if you are in an employer’s pension scheme where the amount of pension you sacrifice in order to receive the tax-free cash makes it inefficient to do so. Once again we will assist you by advising you on whether or not to draw the tax-free cash in your particular circumstances.
The remainder of the fund is used to provide an income for you during retirement. The earliest you can draw your pension is aged 50 (rising to 55 on the 6th of April 2010) and there are various ways in which you can draw your pension benefits.
Firstly you may choose to purchase an annuity. This provides you with a predetermined level of income for the whole of the rest of your life and may also include a continuing spouse’s pension. It may be payable for a minimum of five or 10 years irrespective of your survival and it may be increasing or level during retirement.
We will not only assist you in determining the most appropriate choices with regards to the format of your income but we will also find for you the best annuity rate in the open market.
Some older private pension policies have guaranteed annuity rates built into them. This often gives you a better income than could be secured in the open market. We will always ensure that we check carefully the terms and conditions of your policy to determine if there are any advantageous clauses.
In addition, if you are in ill health or have smoked for many years we may be able to secure for you a specially enhanced annuity rate.
For larger funds, normally in excess of £250,000, you need not purchase an annuity but can draw the income directly from the pension fund. This has additional advantages, for example it enables you to pass part of your pension fund on to your heirs in the event of death before age 75, but it also carries with it additional risks because the fund remains invested rather than providing you with a fixed income.
There are also other options including phased retirement, with profits and unit linked annuities and we will discuss these options with you and we will advise you as to the most appropriate form of income for you during retirement.
For many schemes, once you have made your decision about the form of your retirement income it cannot be changed and it is therefore essential that you receive advice before drawing your retirement benefits.