Pensions
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Modern personal pension plans are simply very useful and crucially tax incentivised structures that can be used to save up money far more quickly that non-incentivised structures due to the extra inputs from HMRC.
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Pensions remain one of the most efficient but at the same time most complex ways to save. You no longer have to save in old insurance company schemes with potential high charges and poor choice – we now have far more flexibility to use the ‘pension rules’ to your advantage. We can now use a ‘pension wrapper’ to hold a portfolio of investments which is then sheltered from tax allowing these funds to grow extremely efficiently.
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Regardless of the medium used to accumulate the savings, careful planning to ensure that you are saving enough on a monthly or annual basis is critical. Regular reviews to assess investment returns, inflation, charges, annuity rates and volatility are paramount to keep the target retirement income on track.
There are three main types of pension:
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The State Pension
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Defined benefit pensions
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Defined contribution pensions
State Pension
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Most people get some State Pension. It’s paid by the government and is a secure income for life which increases by at least the rate of inflation each year.
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You build up your entitlement to the basic State Pension by making National Insurance contributions during your working life. In some cases you can do this even when you’re not working, such as when you’re bringing up children or claiming certain benefits.
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If you’re an employee who reached their State Pension date before 6 April 2016, you may also qualify for Additional State Pension. The amount you get is based on your earnings as well as the National Insurance contributions you’ve made or been credited with. The Additional State Pension is paid with your basic State Pension.
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If you’ll reach State Pension age on or after 6 April 2016 you’ll get the new State Pension. The current rate for the full new State Pension is £155.65 per week. The amount you get depends on your National Insurance record. You will usually need at least 10 qualifying years on your national insurance record to qualify. If you’ve already built up State Pension under the previous system this will be translated into an amount that goes towards your new State Pension.
Defined benefit pension
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You’re most likely to have a defined benefit (DB) pension if you work in the public sector or for a large company.
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This is a salary-related pension which pays out a secure income for life and increases each year. The pension you get is based on how long you’ve been a part of the scheme and how much you earn.
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You might have a final salary type scheme where your pension is based on your pay when you retire or leave the scheme. Alternatively you may have a career-average pension where your pension is based on the average of your pay while you were a member of the scheme.
Defined contribution pension
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With this type of scheme you build up a pot to pay you a retirement income based on contributions from you and/or your employer and investment returns. Defined contribution (DC) pensions include workplace, personal and stakeholder pension schemes. DC schemes might be run through an insurance company or master trust provider, or through a bespoke scheme set up by your employer.
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The size of your pot depends on how much you and your employer contribute,the charges and how well your investments perform.
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Reviewing your pensions
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Many people have a number of old pensions from previous employers, as well as personal pensions. Each of these plans will have different charging structures and each contain different investment funds and options. Some might be ‘high risk’ while other plans might be very low risk. Some might allow flexibility for drawing benefits aligned to your needs, others might be restrictive and only offer an annuity for example. Some older plans may contain valuable features such as Guaranateed Annuity Rates or other Safeguarded Rights - it is import an that you understand what your pension(s) offers you, so you are ready to maximise your income in retirement and draw it in a way that suits you.
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Crucially, ensuring you have the correct investment strategy for your needs so that the returns generated are in line with expectations, the best charging structure for your goals and a pension plan that allows you to spend your money in the most efficient way is absolutely paramount.
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Contact Us to day to understand more.
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General information on pensions can be found at www.moneyadviceservice.org.uk - by clicking this link, you will open a new window of which Sapphire Wealth Management is not responsible for the content.
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