What is a pension?
A pension is a means of saving to build up a fund so that you can draw an income from the fund when you want to retire.
The money you save is invested in line with your wishes, your funds can be invested into low risk investments such as a bank account or higher risk equity based investments. Where you invest will determine the growth your pension will enjoy and the amount of income you will have when you want to retire.
Pension funds grow tax-free and contributions also receive tax relief. When you make a payment, the pension scheme will claim basic tax back from the government. Therefore, if you pay £100 into your pension, the pension will receive an additional £25 tax relief. If you are a higher or additional tax payer, you can claim an extra 20% or 25% tax relief via your tax return.
Because of the tax advantages, there are limits to the amount that you can save. The 2017-18 maximum annual contribution is £40,000, and the maximum pension that you are allowed to build during your lifetime is currently £1m.
Which Pension is right for me?
The ideal pension for you will depend upon your own individual circumstances and what you want to use the pension for. The following is a list of the most common types of pension and why they might be appropriate:
- Personal Pension. This is the most common pension taken by individuals who simply want to save for their retirement. They are competitively priced and offer good fund choice.
- Workplace Group Pension. New legislation came into effect in 2012 where all employers will have to enrol eligible staff into a workplace pension. If you are enrolled into your employer workplace pension, your employer will also have to contribute to your pension.
- Self Invested Personal Pension (SIPP). This type of pension allows specialist investments including commercial property, Discretionary Fund Management and individual equity investment.
- Small Self Administered Scheme (SSAS). This is an occupation pension for companies. It allows specialist investments and can also make loans to the employer.
Drawing your Personal Pension
The minimum age that you can retire is currently age 55.
Traditionally at retirement, most people took 25% of their pension fund as a tax-free lump sum and then used the remaining pension to buy an annuity. The annuity would provide a guaranteed income for life. Over recent years, pension rules have been relaxed to the point where you can now encash your entire pension fund or draw part of the pension as income whilst leaving the rest invested.
In addition, the death benefit rules have also been relaxed; you can now pass residual pension funds to anyone you choose to nominate, which could be a partner, charity or children. This could be as a lump sum (potentially taxable) or they could inherit the pension itself.
Disclaimer
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
Levels, bases of, and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
How we can help you
Pensions are a complicated area and legislation seems to continually change. Whether you need help choosing a pension, advice on where to invest your funds or how best to take benefits, we can guide you through the process.
