Pensions and retirement

The guides and calculators listed here look at pension scheme types, annuities, tax-free allowances and calculators to estimate pension fund shortfalls and state pension eligibility.

 

Pension schemes

Pensions are simple in concept but can be complex in practice. It is vital to seek expert advice in order to ensure that correct planning is arranged.

At its most basic a pension is a fund that you build up over your working life in order to provide income for yourself in retirement.

While most people can rely on some level of state pension, the maximum basic state pension amounts to only £6,359.60 per annum for a single person (2017/18). Therefore, most people consider arranging additional pensions an essential part of their financial planning.

Planning
In order to assess your position, we will need to understand your previous history and any existing pension contracts you may have.

In short, we conduct an audit of your present arrangements. We assess the level of pension that your present arrangements might expect to provide at retirement, to establish whether there is a gap between what you want and what you might get.

Pensions: historical complexity (why we need all your information)
Since the 1970s there have been many types of pension and, sometimes, different types of scheme could have been given the same name. For example, there were retirement annuities, which were sometimes called (for marketing purposes) Personal Pension Plans. Then the Government created a new legal structure called Personal Pension Plans. The result was confusion. Add in Group Schemes, Group PPP, Money Purchase Schemes, S32 Buyout Policies, Stakeholder Pensions, SIPPs and more. So, you can see why this is a complex area.

Maximising existing pensions
In the course of a career you might have accrued various pensions with different employers, or through periods of self employment. This is a complex area and we strongly recommend that you supply us with all your pension documents so that we can assess them.

Taking benefits
For most people, taking benefits is a simple matter of calculating the total value available, and then taking some as tax free cash and some as income (normally through drawdown or an annuity).

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.

Pensions - further details

Core principle - people should be given a pensions system that is as easy to understand as possible, and encourages saving, while preventing abuse by the very wealthy. In some areas (especially corporate and large contribution planning) the rules do not forbid, but simply make unwise, certain courses of action. Expect your financial adviser to sometimes say “Yes you can do XYZ, but .... ” and the “but” will be worth listening to.

All pension schemes must be Registered Pensions Schemes, and contributions are controlled by two allowances:-

Annual Allowance

The amount of contribution that can be made in any one pension input period (typically a tax year, but can be changed) on which tax relief may be obtained.

For the tax year 2017/18 the annual allowance is £40,000.

There is a reduction in the £40,000 annual pension allowance where income, including pension contributions exceeds £150,000.

The annual allowance will reduce by £1 for every £2 of income in excess of £150,000, down to a minimum of £10,000.

The allowance is reduced to £4,000 (from 2017/18) if you have withdrawn more than the 25% lump sum from your defined contribution pension pot.

You can put in more than the annual allowance, but any excess will generally be taxed and will not attract tax relief, so if you wish to do so it is essential that you discuss it with your financial adviser. (This is an example of a “Yes you can, but....” situation).

Most people will be able to invest as much as they can afford, in order to build up a sufficient pension fund for their retirement.

It is also possible to move money from savings to pension, and benefit from tax relief in the process. This might well be worth discussing with your financial adviser, especially in the decade prior to your intended retirement (the aim being to ensure that your post-retirement finances strike the right balance between income and capital).

It is also possible to make contributions on behalf of third parties, (such contributions are treated as having come from the member for purposes of tax relief). This offers scope for people to fund their spouses and dependants' pensions, if they so wish. Discuss this with your financial adviser.

*For pensions provided on a defined benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to assess your position re the annual allowance.

Lifetime Allowance

The maximum tax-free fund allowed* is currently £1,000,000* (2017/18). If you have multiple funds, this is an overall limit.

If your existing funds are above this level (or may grow so) then you need to consult your financial adviser. You may be able to protect your expected rights - contact your adviser urgently.***

*Your fund can build to any size at all, but the excess will be taxed when you take benefits, and the tax is designed to make it generally financially unsound to over-fund your pension.

** For pensions provided on a defined benefit basis, the value of benefits will be translated into a notional fund, which is then used to assess your position re the lifetime allowance.

Pension eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future. The value of pensions can fall as well as rise and you may not get back the amount you originally invested.

 

Registered pension schemes

Schemes to provide pensions are generally registered pension schemes.*

There are four main types of pension scheme, called arrangements:-

Defined benefit arrangements

Benefits are determined by specified criteria, and are not dependent on the amount of any fund. A common type of defined benefits arrangement is a 'final salary' scheme, where the benefits depend on your salary and length of service, although many final salary schemes have closed in the last 15 years.

Money purchase arrangements

Money purchase arrangements are also known as defined contribution schemes. Benefits are entirely dependent upon the funds built up for the member. Most arrangements made by individuals are of this type, as are many company schemes. The following types of pensions are normally money purchase:

Hybrid arrangements

These occur when a scheme promises some kind of minimal value or benefit, irrespective of actual fund performance.

For example, the terms might be '1/60th for every year of service, or whatever the fund buys, if greater'. If performance was good then the full fund will be used and it will be a money purchase arrangement. If there was poor performance, then the scheme would pay out the 1/60th and be seen to be defined benefit.

Cash balance arrangements

A type of money purchase arrangement where, in the event that the funding fails to provide the required level of benefits, it will be made up to that level.

* In theory there can be other schemes which are not registered, but as these would not benefit from the favourable tax treatment of registered pension schemes their use is expected to be limited, normally only for people whose unusual circumstances prevent them qualifying for a membership of a pension scheme, or who are over their lifetime allowance and need alternative arrangements. Such schemes, however, fall outside the tax regime for pensions.

A pension is a long term investment; the fund may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

 
 

MPA Financial Management Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register No: 434931 http://www.fca.org.uk/register.
MPA Financial Management Ltd Registered Address: MPA Financial Management Ltd 98 High Street Henley in Arden Solihull B95 5BY. Registered in England & Wales, No. 04111009.
Neither MPA Financial Management Ltd nor its representatives can be held responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
The Financial Conduct Authority does not regulate National Savings or some forms of mortgage, tax planning, taxation and trust advice, offshore investments or school fees planning.
The information contained within this site is subject to the UK regulatory regime and is therefore targeted primarily at consumers based in the UK.
Please read our Privacy Statement before completing any enquiry form or before sending an email to us.

Website by HTDL