The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

Tax Planning is not regulated by the Financial Conduct Authority.

Personal pensions may be suitable if you’re employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.

You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.

Funds are usually run by financial organisations like building societies, banks, insurance companies, and unit trust companies.

The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.

Contribution Levels and Tax Relief

The Annual Allowance for pension contributions is £40,000pa from 6 April 2018. This figure includes total employee, employer and third party contributions.

Tax relief is given at up to the individual’s highest marginal rate. This means that high-earning individuals can receive up to 45% tax relief on their contributions. However from 2016/17 onwards the £40,000 annual allowance is reduced for those with threshold income (taxable income excluding pension contributions) over £110,000 and adjusted income (taxable income including employer pension contributions) over £150,000. The annual allowance is reduced by £1 for every £2 of adjusted income over £150,000 down to a minimum annual allowance of £10,000 (reached when adjusted income is £210,000 or more).

If total contributions exceed the annual allowance the excess is added to the individual’s income and taxed accordingly. The tax can either be paid by the individual or in some cases can be paid by a deduction from the pension plan (known as ‘scheme pays’).

You can carry forward unused annual allowances from the previous three years (ie. back to 2014/2015 for 2017/18), potentially allowing contributions of up to £160,000 in a single year for some people. HMRC has confirmed that you do not need to have made a contribution to a registered pension scheme in a year to be able to carry forward unused annual allowances – an individual must have been a member of a registered pension scheme at some point during the earlier tax year. The definition of a ‘member’ includes an active member, a pensioner member, a deferred member; or a pension credit member.

If you wish to carry forward unused annual allowance from previous tax years, you will need to have used up the annual allowance for the current year.

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

Higher-rate taxpayers

If you’re subject to the higher tax rate of 40 per cent (up to 45% for additional rate taxpayers), you’ll still get 40% or 45% per cent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:

• You pay your contributions after deducting 20% tax relief and this 20 per cent tax relief is claimed back from HMRC by your pension scheme and added to your plan in the same way as for a lower rate taxpayer.
• It’s up to you to claim back the other 20 per cent if you’re a higher rate tax payer or 25 per cent if you’re an additional rate tax paper on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is given to you rather than being added to your pension plan.
• Your pension fund will invest the money you save (including the basic rate tax relief amount) in your pension. Your pension fund will benefit from growth and income from its investments and these accumulate free from tax.

Drawing your Personal Pension

You can take a pension commencement lump sum of up to 25% of the value of your pension savings, which is currently tax free, when you retire (up to a maximum of 25% of the lifetime allowance). The lifetime allowance for the tax year 2018/2019 tax year is £1.03 million.

You then have two main options:

• Use the rest of the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company. This does not have to be the same company that you have your pension plan with. 
• Take a regular or ad hoc income (taxed at your normal Income Tax rate) from the remainder of your fund while it remains invested.

It should also be remembered that under the new pension flexibility rules, one off lump sums may be available to be taken from the pension plan from age 55 onwards. These lump sums will be available subject to the scheme rules allowing, and there will be taxation issues to consider if income is taken.

Putting money into someone else’s personal pension

You can put money into someone else’s personal pension (eg. your spouse/partner, child etc). You will pay the net amount after deducting 20% tax relief and the pension plan member has tax relief added to their plan at the basic rate. You can’t claim any additional tax relief on your contributions though as the contributions are classed as having been made by the pension plan member (so if they were higher or additional rate taxpayers they could claim some tax back). If they have no earned income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief).For example, if you put £80 into a spouse or civil partner’s pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.

The value of units can fall as well as rise, and you may not get back all of your original investment.

Scottish tax allowances and rates may differ. You should consult a financial adviser for more detailed information.

The tax treatment is dependent on individual circumstances and may be subject to change in future.

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

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

Income Drawdown plans are complex. It’s a good idea to get professional advice because what you decide now will affect your pension income for the rest of your life.

Income Drawdown is a more flexible alternative to the traditional annuity route, offering greater choice and control for many people.

Benefits

You can put off buying an annuity, and instead withdraw a regular income or take adhoc withdrawls from the pension fund while the remainder of the fund stays invested. While the fund remains invested, you could benefit from growth in the market – and from ongoing advice.

Anyone from the age of 55 (expected to rise to 57 from 2028 and then remain 10 years below state pension age) can set up a Drawdown contract. It could be suitable if you:

• want to vary your income over time, to reflect changes in your circumstances
• want your pension fund to continue benefitting from potential investment growth, and you’re prepared to accept the risk that the value of the fund may fall
• have other sources of income
• want to maximise the benefits your family receives upon your death, and also give more choice about how they receive these benefits
• are in ill health, and would like to pass on remaining assets to your estate
• want to control the time at which you buy an annuity
• want to maintain an active interest in managing your pension fund

Summary

Typically, Income Drawdown suits people who are not averse to investment risk, and who have larger pension funds.

However, there are no guarantees that income will be greater than if the fund was used to purchase an annuity at retirement. There is also no guarantee that the initial income level selected will be maintained. The costs of Income Drawdown are normally higher than for an annuity.

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

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

Tax Planning is not regulated by the Financial Conduct Authority.

The fundamental idea behind a personal pension plan is simple. You put money into a savings fund and it hopefully grows in value. At retirement, you have several options which are usually designed to replace some (or all) of your employment income.

These notes apply to an individual who is looking to establish a personal pension or stakeholder pension.

1. PAYMENTS IN

You can typically save into a pension plan in one of two ways:

• Regular instalments – The pension payment can be taken automatically each month by Direct Debit. Once you start making regular contributions in this way, and become accustomed to the regular payments going out of your account, you may find it easier to plan your monthly budget.
• One-off investments – Some people prefer the flexibility of making one-off investments at a time of their choosing, rather than commit to regular monthly contributions. Providers usually place minimum contribution amounts on single premium payments. This method can be useful where earnings/income for the tax year aren’t known until closer to the end of the tax year.
  It is your responsibility to make sure that the contribution is made.
• A combination of the above – This provides both the discipline of regular investments and enables one-off investments to also be made so that the best use of the available tax relief can be made.

2. TAX CONSIDERATIONS

Tax relief

Tax relief is granted on pension contributions within allowable limits. Currently, the basic rate of tax is 20% and higher rate is 40%. The additional rate is 45%. 

For individuals contributing to a personal pension or stakeholder plan, the contribution is made net of basic rate tax. If you invest £80 into a personal pension, the provider will add the remaining £20 and invest £100 on your behalf (claiming the tax relief back themselves from HMRC).

If the investor pays tax at higher rates, it is possible to claim back the marginal rate via a tax return (higher and additional rates) or via a tax code adjustment for higher rate relief.  In the example above, £100 is declared on the self-assessment tax return. The tax office will then credit you with the additional £20 of tax relief (so £20 of tax relief is paid into the pension plan and £20 is credited to the investor). 

Self-employed investors also receive 20% tax relief immediately and claim any higher rates of tax relief via their tax return.  As the income of a self employed person may be unclear until the tax year has ended, care should be taken to understand the effect on self-employed tax assessments when making pension contributions..

The tax treatment is dependent on individual circumstances and may be subject to change in future.

 

Restrictions on payments

The total amount you (and your employer or other third parties) can save each year toward a pension, without suffering a tax charge, is limited to the ‘annual allowance’. The annual allowance for the tax year 2018/19 is £40,000 for most people (but can be less for those with high income). You may be able to carry forward unused annual allowance from the previous three years (ie. back to 2015/2016 for 2018/19).

In addition to the annual allowance, your personal contributions that are eligible for tax relief are limited to 100% of your earnings or £3,600 if greater. You can invest up to £3,600 per year gross in a personal pension (and still receive the 20% tax relief) even if you have no earnings. As the person making the contributions does not have to be the same as the person benefiting from the pension, this facility can be helpful in providing a pension for a non-working spouse – or for children and grandchildren as part of inheritance tax planning.

3. INVESTMENTS

You will have to decide on the type of fund in which you invest your money. Most pension providers have a wide range of funds available – some have literally hundreds. Essentially, funds break down into two categories:

• Unit Linked funds – These are pooled funds, linked to the performance of underlying investments – usually equities (ie. stocks and shares). The money is used by the fund manager to purchase more of the fund’s underlying assets. The price goes up and down in line with the investments held. If the market falls, so does the unit price. This can be good news for people investing with a long time to go (a new cash investment will buy more units), but bad news for people about to use their fund to provide retirement benefits. Those approaching retirement tend to switch funds into less volatile investments to avoid this risk.

  The value of units can fall as well as rise, and you may not get back all of your original investment.

• With Profit funds – These also invest in stocks and shares and other assets, but the fund manager tries to smooth out the peaks and troughs of unit linked funds by holding back some of the growth as a reserve. This can provide a smooth increase in value in your investments.

  A Market Value Adjustment might apply on encashment. The value of this policy depends on how much profit the company / fund makes and how they decide to distribute that profit.

4. PROJECTIONS

Growth assumptions

When projecting pension fund values, certain growth assumptions are made by pension providers. 

The FCA standard non-inflation adjusted growth rates are 2%, 5% and 8%. Inflation adjusted this equates to -0.5%, 2.5% and 5.5%. 

Pension options

From 6 April 2015 new “Pensions Freedom” legislation came into effect, and consequently, at retirement, there are now many new options as to how you take your pension. For further details please refer to our “Your Retirement Options and Pensions Freedom” article.

5. HOW MUCH SHOULD I INVEST?

You should invest as much as you can comfortably afford, as soon as you can, within allowable limits. You should not overstretch yourself. Most modern pension plans are flexible in terms of allowing contributions to be increased, decreased or temporarily stopped as circumstances dictate.

The actual amount you should invest will be different for each individual. Once you have arrived at a figure, it is useful to try to link it to salary. If you have decided that you can afford £100 per month and you earn £20,000, a quick calculation will show this amounts to around 6% of salary. Try to maintain that link in future years.

You may choose to calculate the level of savings necessary to achieve a certain level of income (in today’s terms) at your chosen retirement date. This target funding is then reviewed on a regular basis to account for revised objectives, investment performance and changing market conditions.

6. WHAT ABOUT STATE BENEFITS?

The new State Pension is a regular payment from the government that you can claim if you reach State Pension age on or after 6 April 2016.

You can get the new State Pension if you’re eligible and:

• a man born on or after 6 April 1951
• a woman born on or after 6 April 1953

If you reached State Pension age before 6 April 2016, you’ll get the State Pension under the old rules instead. You can still get a State Pension if you have other income like a personal pension or a workplace pension.

The full new State Pension is £164.35 per week (2018/19). How much you get will depend on your National Insurance record. You’ll usually need 10 qualifying years to get any new State Pension. Furthermore, you may need around 35 years to qualify for the full new State Pension.

The amount you get can be higher or lower depending on your National Insurance record. It will only be higher if you you have a pre 6/4/16 National Insurance record including a certain amount of Additional State Pension.

7. WHAT ABOUT OTHER FORMS OF SAVINGS?

Obviously if you are serious about retirement planning, you should not necessarily concentrate all your savings into the one area of personal pensions. However, personal pensions will certainly form part of your overall strategy.

8. SUMMARY

If you are considering starting saving for your retirement, ask yourself:

• Is the level of savings you are proposing realistic from a retirement and state pension perspective?
• Do you want the discipline of a monthly investment or could you make lump sum payments from time to time (or both)?
• How much would you need to live on, if you retired today? It’s then possible to begin calculating the cost of achieving that objective.

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

The value of pensions and in the income they produce can fall as well as rise. You may get back less than you invested.
The Financial Conduct Authority does not regulate on Automatic Enrolment.

What is Automatic Enrolment?

The government has introduced a new law designed to help people save more for their retirement. It requires all employers to enrol eligible workers into a workplace pension scheme if they are not already in one. Automatic enrolment started being phased in from October 2012 and will be fully rolled out by 2018. Most employers will have to set up and contribute to a pension scheme suitable for automatic enrolment.

Understand your workforce

You will need to understand the different types of workers and what defines them, as well as the corresponding employer duties for each type of worker. Some types of contracts will require close examination to identify where the employer duties lie eg. for agency workers or contractors.

Business software and systems processes

Many of the functions necessary to comply with automatic enrolment duties are process-driven. Business software (eg. payroll, HR and pensions administration) should be set up to automate the majority of these processes, such as monitoring ages and earnings of workers and deducting pension contributions.

Review pension arrangements

You may have existing pension schemes you want to use for automatic enrolment. These schemes will need to meet certain criteria, which could involve changing the scheme rules or terms and conditions. You’ll need to understand how the new legislation fits with existing pension arrangements, such as salary exchange or contractual enrolment.

Communication

There is a range of information that you are required to provide to your workers, such as providing them with financial information about the contributions that they and you may be making towards their pension. Some information must be sent individually to each worker as well as making sure the right person gets the right information at the right time (eg. if they change worker category).

Compliance

There are certain employer duties you must comply with. If you fail to comply with your duties The Pensions Regulator may take enforcement action and issue a notice and or a penalty.

Registration

You are required to complete a declaration of compliance for The Pensions Regulator to inform them what you have done to comply with your automatic enrolment duties. The duty to complete the declaration of compliance lies with the employer and needs to be completed within the five months following your duties start date.

Information in this article is based on our understanding of the relevant legislation at the time of writing [Aug 2017]. For further information visit The Pensions Regulator website.

The value of pensions and in the income they produce can fall as well as rise. You may get back less than you invested. 
The Financial Conduct Authority does not regulate on Automatic Enrolment.

What is Automatic Enrolment?

A workplace pension is a way of saving for retirement arranged by an individual’s employer. It is sometimes called a ‘company pension’, an ‘occupational pension’ or a ‘works pension’.

Automatic enrolment into a workplace pension is an easy, hassle-free way for workers to save for their retirement while they are earning.

Saving into a workplace pension can also help individuals to build up pension savings more quickly as they are not saving on their own. Their employer and the government (in the form of tax relief) also pay into the workplace pension.

Why is this happening?

Millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing and at the same time people are saving less into pensions.

In 1901 there were 10 people working for every pensioner in the UK. In 2010 there were 3 people working for every pensioner. By 2050 it is expected that this will change to just 2 workers.

Who will be enrolled into a workplace pension?

Employers will automatically enrol workers into a workplace pension who:

• are not already in a qualifying pension scheme
• are aged 22 or over
• are under State Pension age
• earn more than £10,000 a year (this figure is reviewed every year though it has remained unchanged since 2014), and work or usually work in the UK

Opting out of a workplace pension

If a worker opts out within one month from the day they officially become a member of the scheme, it will be as if they were never a member of the pension scheme and any payments made by them to their pension will be refunded. If they choose to opt out after this period, depending on the scheme, the payments already made may not be refunded and will remain in their pension scheme until they retire.

Deciding to rejoin a workplace pension

Staff who have previously asked to leave the scheme, either after being enrolled or opting in, can opt in again. But if they’ve already asked to opt in during the last 12 months and subsequently asked to leave or ceased membership, it’s up to the employer to decide whether to enrol them again.

If a worker opts out or stops paying into the workplace pension their employer has a duty to automatically enrol them back into their pension scheme at regular intervals, usually every three years. This is to give those workers who have stopped saving into a workplace pension the opportunity to reconsider their finances and pension saving options. They can choose to stay in this time or opt out again.

Information in this article is based on our understanding of the relevant legislation at the time of writing [Aug 2017]. For further information please visit The DWP – Workplace Pensions website.