Pensions and Retirement Planning
Saving for later life is something that everyone will need to consider at some stage in their lives.
With changes to the state pension, unless we make our own provision, we could find ourselves being forced to work until we are much older, rather than perhaps doing other things we prefer such as spending time with our families, travelling or simply enjoying retirement. The question is whether you want to have some control over that decision.
The earlier you start to save the more time you will have to build up a sizeable nest egg for your future. Even if you start saving a small sum, with growth in the fund, over many years this could build up to a significant amount.
Planning for your retirement can be complex.
Aspects to consider when choosing or paying into a pension (this list is not exhaustive)
- How much do I need to pay in?
- Is there a limit to how much I can contribute?
- What are the benefits?
- Where should I invest my money?
- Can my existing pension facilitate my requirements?
- Does my employer offer a scheme and do they contribute?
- Is a pension the best way to save for retirement or should I consider other options?
Let Future Start take the worry and stress out of choosing the solution that will best suit you; let us use our expertise to help you make the right choices.
Sound financial planning can ensure that through your retirement you have the security and the ability to live the life you want without fear of ever running out of money. It will also ensure that you have a range of investment products that enable you to build up your wealth and draw it down in the future in the most tax efficient manner.
Points you may wish to consider (this list is not exhaustive)
- Are either party likely to remarry in the future?
- Is splitting the pension the best way to reach a settlement or would it be more prudent to distribute other assets?
- What will happen to the pension upon the death of the pensioner?
- What is the tax position for both parties?
- How much lifetime allowance remains for both parties?
- When does each party plan to retire?
- How shall I invest my share of the settlement?
Even when your divorce is amicable and you both agree on the settlement the final outcome should be confirmed through a court order.
It should be noted that if a couple is not married or in a civil partnership their pensions cannot be shared in the event of separation.
The three ways courts deal with pension arrangements upon divorce are:
1. Pension sharing
The pension of your former spouse or civil partner is divided and you receive a proportion of this. This proportion is now legally treated as yours. This option is often the most favoured approach as it is viewed as a ‘clean break’.
2. Pension offsetting
All assets, both yours and your ex-spouse or civil partner, are taken into account and, though you retain your pension assets, they are then offset against other assets for example, a house.
3. Pension earmarking
Part of your pension and retirement benefits are paid to your ex-spouse or civil partner. This option is viewed as less of a clean break because payments are being made from a former spouse or civil partner’s pension.
State Pension on divorce
This is dependent on which State Pension you receive. Basic State Pension cannot be shared in the event of divorce or dissolution of a civil partnership. National insurance contributions may be used by a former spouse or civil partner to increase their own basic State Pension. This will not reduce the amount of State Pension the other person receives.
If you are in receipt of an additional State Pension this may be shared but, these rights are forfeited in the event of remarriage or a new civil partnership.
The new State Pension cannot be shared.
The new system applies to:
men with birthdays after 6th April 1951
women with birthdays after 6th April 1953
So if you retired before 6th April 2016, the single-tier system won’t affect you and you’ll continue on the previous two-tier system.
- Unlike the old system, not everyone in the UK will be entitled to a state pension.
You’ll need to have made National Insurance contributions (NICs) for at least ten years (Not necessarily consecutive years and some people will be exempt from this rule including some parents, carers and jobseekers).
- In order to receive the new state pension in full, you’ll need 35 qualifying years of NICs, up from 30 years under the previous system.
- Some people are unlikely to receive the full amount due to being contracted out of the old second state pension before April 2016, having paid a lower rate of National Insurance. Most of these will be public sector employees, such as teachers, members of the armed forces and those working in the NHS. How much less these people will receive will be determined by how long they were contracted out of the second state pension. Equally, those who have been paying into the second state pension before April 2016 will have this protected, meaning they may receive more than the £155 per week basic rate.
After the transitional period, those who are likely to lose out in the long-term are those currently in their 20s and 30s, due to making standard NICs but not being able to benefit from the second state pension as those under the old system did. It’s estimated that two in three people currently in their 30s will theoretically be £17,000 worse off over the course of their retirement. That rises to around 75% in current 20-somethings who are set to lose a notional £19,000. There will of course be those who will be better off under the new system – around six million by 2030 according to government estimates.
As a general rule, and assuming a pension age of 70 by the year 2050, if you were born before 1980 you can expect to benefit from the flat-rate pension; in contrast, those born after 1980 have a greater potential to be worse off.
One of the most important stages in life which everyone has to save for is retirement and one of the most significant financial decisions in life is what to do with those savings when retired.
In April 2015, the consultation known as ‘Freedom and Choice in Pensions’, ruled that everyone with defined contribution pensions would now be entitled to flexibility regardless of their total pension wealth.
For more information on these changes, check out the free downloads in our Guidance section.
The new flexibility with regard to pensions means that they can be used in conjunction with other investments an individual may hold to allow for more tax efficient planning.
For example, you may wish to draw down from your ISA to fund your monthly expenditure rather than use your pension, in order to keep your total pension income below your personal allowance thus potentially paying less income tax.
Since the changes have allowed pensions to be passed on more favourably from an inheritance tax point of view, using other assets to provide income leaving the pension untouched may prove more prudent.
It is important to bear in mind that there is a whole range of planning opportunities in addition to those mentioned above, though not all opportunities are suited to every individual.
Contact Future Start today to see if you could benefit from any of the opportunities available.
The purpose of this section is to give some background on final salary pensions. Since the Chancellor announced radical changes to the way people could draw their pension pots when they reached retirement we have seen increased levels of enquiries around transferring final salary pensions.
Also known as defined benefit schemes a final salary pension is an occupational pension scheme provided by an employer for their employees where the amount you get in retirement is based on a percentage of your salary at retirement, close to retirement or even on an average of your earnings over your employment. The guaranteed nature of the benefits is a major advantage for employees. For today’s employees it is more common for an employer to provide a defined contribution scheme. There are many types of defined contribution pension schemes including; personal and group personal pensions, stakeholder and group stakeholder pensions and self-invested personal pension’s. With these types of schemes the benefits that you receive in retirement are not guaranteed by the employer. Instead the income and benefits that you receive are dependent on many factors including; the size of your fund in retirement, how you choose to take your benefits and/or how much income your fund can purchase, annuity rates and investment returns.
Final salary schemes tend to provide superior benefits to other types of pensions, in terms of both the level and range of benefits. However, a major disadvantage is that final salary schemes are very restrictive in how and when they let you take your pension benefits. It should also be noted that the value of the guarantees is only as good as the scheme states when the employer can afford to honour them. Where an employer cannot, the scheme may fall to the pension protection fund (PPF) and the benefits you receive may be less.
At Future Start we do offer advice on occupational pension transfers as part of our professional service. It is key to note here the word ‘advice’. We do not take instructions (also referred to as execution only) to transfer from an occupational pension scheme without conducting a thorough review of the benefits our clients would be giving up by transferring away. As part of our Financial Planning process we work with our clients to understand their goals, risk and circumstances and then recommend they take action where appropriate. As such, if we feel that your existing final salary pension scheme is best placed to fulfil your objectives we will tell you and recommend that you do not transfer.
Although the guaranteed nature of the benefits on offer from a final salary pension scheme are very valuable there are several reasons why people may wish to transfer away, including;
- Wanting to release tax free cash without taking an income
- Wanting to enhance the death benefits to pass on to their family
- Wanting more flexibility in how benefits can be drawn such as increasing/decreasing income or taking a lump sum
- Wanting more control over how their pension fund is managed
- Worried about the strength of their scheme (the funding level)
This list is not exhaustive. Contact us if you would like to find out more about transferring an occupational pension.
When you enquire about transferring your final salary pension benefits from your employer pension scheme, the scheme trustee’s calculate and issue you with a cash equivalent transfer value (CETV). In simple terms, the CETV is the amount the trustees will give you in order for you to give up all claim to any benefits of your final salary pension.
The amount of the CETV is based on a complex set of actuarial calculations. The amount provided is intended to be enough for the individual to purchase the equivalent benefits that would have been provided by the final salary scheme at their scheme retirement age.
The four steps to the calculations are as follows:
- Calculate the member’s preserved pension at the date of leaving
- Revalue the preserved pension up to the scheme’s normal retirement age
- The higher the revaluation levels the larger the resultant CETV
- Calculate the capital cost of buying the revalued pension at normal retirement age
- Based on annuity rates. If annuity rates are low, the amount needed to buy the equivalent pension benefits from an insurance company will be higher and vice versa. Low annuity rates would result in an increased CETV offered to an individual
- Discount this capital cost at retirement to the present to provide its current capital value
- The discount rate is based on the assumptions used by the trustee’s as to the pension scheme investment returns. In an environment of poor investment returns the revaluation rate would generally be lower and vice versa. The Department of Work and Pensions instructs trustee’s to have due regard to the investment strategy of the scheme; if it is low risk, this could mean a potentially lower return, therefore the revaluation factor should be lower. An environment of poor investment returns could result in the trustee’s using a lower revaluation figure which in turn could result in a higher CETV
- Secure income, such as an annuity
Some people want the security of knowing that they have an income for life without running the risk that it will ever run out. A secure income is the option they would likely seek.
- A mixture of secure and flexible income
Some people would like to know that their essential monthly expenditure is met by way of a secure income, but for more ad-hoc expenditure, such as holidays, would prefer to vary the amount and frequency by which it is taken. This person is more likely to seek a mixture of secure income and flexible income.
- Flexible income, such as drawdown or an un-crystallised fund pension lump sum (UFPLS)
The final option may be explored by those that wish to have flexibility in how they draw their pension provisions. They may have alternative sources of income such as a buy-to-let portfolio and therefore not need regular income from their pension.
Consequently, they may wish to draw just the tax free element of the pension without drawing an income (normally up to 25%) perhaps to make a purchase or consolidate debt. They may not need a regular income and prefer instead to take ad-hoc lump sums, taking the tax free cash in stages rather than all at once. In the majority of cases, the option for secure income cannot usually be changed once set up. The flexible option remains invested which means the value of the fund or income could fall depending on market conditions.
It is important to note that not all pensions offer the same options at retirement.
At Future Start we will help you explore your options taking account of your personal circumstances and your hopes and aspirations for retirement. At the end of this process we will make our detailed recommendations.
For more information about your options at retirement download our free guide from the Guidance section of our website.
Before engaging an adviser you may wish to explore your options using Pension Wise the Government service that provides free guidance. Pension Wise provides guidance on defined contribution pensions. Pension Wise does not offer full regulated advice on the most suitable option for you.