Pensions

Saving for retirement is something that most of us put off for as long as we can. But the reality is that the sooner you start paying into a pension the higher your income in retirement is likely to be.

State Pensions

If you're working you're usually building up the right to a basic State Pension - and possibly an additional State pension - but these may not be enough to give you the standard of living you want.

This section will help you to understand the benefits of using a pension to save for your retirement, what type of pensions are available, how they work and how to start saving for your retirement.

What is a pension?

Pensions are long-term investments with special tax rules - for example, you get tax relief on contributions.

You can't access the money in your pension until you reach age 55. Some pension schemes have additional rules about when you can take your benefits - check with your scheme provider.

You no longer have to stop working to draw a pension as long as your scheme's rules let you.

Types of pensions

There are three main types of non-State pension. They are:

• Occupational salary-related schemes - offered by some employers.
• Occupational defined contribution schemes (also called money purchase pensions) - offered by some employers.
• Stakeholder pensions and personal pensions - offered by some employers, or you can start one yourself.
• You may also be offered a group personal pension at work. These are also money purchase pensions.

Pensions at work

Automatic enrolment – an introduction

Under a law introduced in 2012, all employers must offer a workplace pension scheme and automatically enrol eligible workers in it. This requirement has applied to larger employers since October 2012 and by 2018 will apply to all employers.

How are workplace pensions changing?

To help more people to start saving for their retirement, the government has made major changes to how workplace pensions operate.

Until now, it’s been up to workers to decide whether they want to join their employer’s pension scheme. But by 2018 all employers will have automatically enrolled their eligible workers into a workplace pension scheme unless the worker opts out. As a result, many more people will be able to build up savings to help cover their retirement needs.

When does automatic enrolment start?

Automatic enrolment is being introduced in stages between 2012 and 2018. The largest employers started first, followed by medium-sized and then small employers. Nearer the time your employer will tell you the exact date and whether or not you’re eligible for their scheme.

Who will be automatically enrolled?

Whether you work full time or part time, your employer will have to enrol you in a workplace pension scheme if you:

• Are not already in a suitable workplace pension scheme
• Are at least 22 years old, but under State pension age 
• Earn more than £10,000 a year (tax year 2016-17), and Work in the UK

As long as you meet these criteria you’ll also be covered if you’re on a short-term contract, or an agency pays your wages, or you’re away on maternity, adoption or carers’ leave. If you earn less than this you can ask to be enrolled and, as long as you earn more than a certain amount, your employer has to enrol you and make contributions for you.

Do I have any choice about being enrolled?

You can opt out of your employer’s workplace pension scheme after you’ve been enrolled. But if you do, you’ll lose out on your employer’s contribution to your pension, as well as the government’s contribution in the form of tax relief.

If you decide to opt out, ask the people who run your employer’s workplace pension scheme for an opt-out form. You must then return your completed form to your employer, not to the people who run the scheme.

If you decide to opt out within a month of being enrolled, any payments you’ve made into your pension pot during this time will be refunded to you.

After the first month, you can still opt out at any time, but any payments you’ve made will stay in your pension pot for retirement rather than be refunded.

You can re-join your employer’s workplace pension scheme at a later date if you want to. And your employer must by law re-enrol you back into the scheme approximately every three years, as long as you still meet the eligibility criteria.

How much will I have to contribute?

There is a minimum total amount that has to be contributed by you, your employer, and the government in the form of tax relief. The minimum contribution rate is currently 8% of qualifying earnings of which at least 3% must be paid by the employer. This means if you are opted-in, you contribute 5% from your income, and your employer contributes 3%.

From the 2019/20 tax year, contributions start at 8%, so from April 2019 contributions are 8% (3% employer and 5% employee, the government also give tax relief at 20% so the employee contribution is, in effect, 4.8%).

As of April 2019, contributions have an upper and lower threshold of £50,000 and £6,136

If someone earns £24k per year contributions are made on £17,864 (24,000-£6,136)

If someone earns £47k per year contributions are made on £43,864 (£50,000-£6,136)

To give an idea of contributions, here is an example of someone on an annual salary of £24k:

From April 2019 – 8% (3% plus 5%)

The employer would contribute £44.64 per month and the employee would contribute £74.40 per month, the government will give 20% tax relief on the employees contribution so the amount they actually contribute is £59.52 (plus a £14.88 contribution from the Government from tax relief).

Increases in the minimum contribution

The total minimum contribution is currently set at 2% of your earnings (0.8% from you, 1% from your employer, and 0.2% as tax relief). From October 2017, it will increase as follows:
October 2017 to September 2018: 5% of your earnings (2.4% from you, 2% from your employer, and 0.6% as tax relief)

From October 2018 onwards: 8% of your earnings (4% from you, 3% from your employer, and 1% as tax relief)

Should I stay in or opt out?

For most people, staying in a workplace pension is a good idea, particularly if the employer is contributing to it. Workplace pensions are a great way to save for retirement. However, there are circumstances in which it might not make sense to stay in – for example, if you are dealing with unmanageable debt.

What are the benefits?

• Normally your employer normally contributes; and
• often you also get other benefits. such as:
• life insurance which pays a lump sum and/or pension to your dependants if you die while still in service:
• a pension if you have to retire early because of ill-health: and
• pensions for your spouse and other dependants when you die.

Not all pensions offered by employers are occupational pensions. Your employer may offer a stakeholder pension or a personal pension through a group personal pension arrangement. These pensions are not called occupational pensions even though the employer may contribute

 

Information regards taxation levels and basis of reliefs are dependent on current legislation, individual circumstances are not guaranteed and may be subject to change.

 

Taking your pension

 

You now have more flexibility in the way in which you can access and use your pension pot after the age of 55.

 

You will be able to:

• Take up to a quarter (25%) of your pension pot tax-free and convert some or all of the rest into a taxable retirement income
• Take up to a quarter (25%) of your pension pot tax-free and take some or all of the remainder as a lump sum, which will be taxed as if it were income, or
• Withdraw your cash in stages, with a quarter (25%) of each withdrawal tax-free and the remaining three quarters (75%) taxed as if it were income

You can still continue to save into your pension and benefit from tax relief, even after you have started withdrawing your cash, this will however trigger a reduction in the annual allowance contributions.

 

Pension wise is a free and impartial service backed by the government that help you understand you’re your choices are for using your pension pot and how they work by telephone, online or face to face. https://www.pensionwise.gov.uk

 

Why the changes?

 

Most people have used their pension pots to buy an annuity to provide a regular retirement income – and this option will still be available. The changes are being introduced to offer you complete choice and flexibility about how you use your pension pot to fund your retirement income. They will also encourage more people to save for retirement.

 

What happens if you die?

 

It has also been announced that the death tax on pension funds of 55% is to be scrapped. This means if you die before age 75 with some or all of your pension fund still invested, this will pass to your beneficiaries tax-free.

If you are 75 or over when you die your beneficiaries can either:

• Draw money from the fund themselves which will be taxed at their marginal rate (as if it were income), or
• Take the fund as a lump sum, lump sums will be taxed at the beneficiaries’ marginal rate

These reforms apply to payments made on or after 6 April 2015, rather than to deaths on or after 6 April 2015.

 

Pension pots of £30,000 or less

 

If you are aged 60 or over and your total pensions savings (excluding State Pension entitlement) amount to £30,000 or less, you can now take the entire amount as a cash lump sum. This is called ‘trivial commutation’.

Alternatively, if you have small pension pots of £10,000 or less you can take up to three of these as a cash lump sum. You can do this even if your total pension savings exceed £30,000.

Either way, you are entitled to receive a quarter (25%) of each pot’s value tax-free. You then pay tax on the rest as if it were income.

 

Examples:

 

If you have one pension pot worth £28,000 and you take it as a cash lump sum, £7,000 will be tax-free, but you’ll have to pay Income Tax on the remaining £21,000.

 

If you have three pension pots of £3,000, £5,000 and £8,000, you are entitled to take a quarter of each amount tax-free. The combined value of these pots is £16,000, so you would get £4,000 tax-free and pay Income Tax on the remaining £12,000.

 

How taking a lump sum affects your retirement income:

 

If you decide to take all your pension pots as cash, then you lose the option of converting them into a regular retirement income – for example, by buying an annuity.

 

Cashing in your pensions pots may also affect how much you’re entitled to in state benefits when retired. For example, if you boost your savings by taking your whole pension as a lump sum this may reduce your entitlement to Pension Credit.

 

Depending on your current income and the size of the lump sum, it may also affect how much Income Tax you pay if you re-invest it and so increase your overall annual income.

Please contact Tony Rossborough