A pension is essentially a long-term savings plan to help you save for life after work. The concept is simple, but the pensions landscape has evolved into what looks like a complex beast.
Luckily, saving for your future doesn’t need to be complicated or intimidating. Investing in a personal pension could help you unlock the future you deserve and give you the freedom and financial confidence to focus on the important things in your life today.
What is a pension?
Pensions come in many different shapes and sizes, whether it’s from the state or a scheme from your employer. It guarantees you a regular income throughout retirement, or allows you to invest your savings to grow it for your future income.
A pension is essentially a fund that invests in the financial markets, allowing you to boost your savings for your retirement. You can manage this pension yourself, or if you’re not comfortable managing your investments for such a financially important stage in your life, you can get the experts to do it for you.
You won’t be able to access your money until you’re 55 – which isn’t actually a bad thing when you think about it. There are also a number of benefits to help you maximise your savings and be more financially prepared for the future.
Defined benefit pension (or final salary pension)
A defined benefit pension scheme pays out a secure, regular income throughout your retirement.
The amount you get depends on a number of factors including the number of years you’ve been employed, your age and the scheme’s accrual rate – the percentage of your salary you’ll get as an annual retirement income.
Also known as a final salary pension scheme and associated with big organisations like the NHS and government, both you and your employer will pay into your pension plan throughout your career.
Defined contribution pension
The most common pension scheme to save into today is a defined contribution pension. Both you and your employer pay into your pension pot throughout your working life, but unlike the defined benefit scheme, there is no guarantee to how much you get in retirement.
The amount you get depends on how much you and your employer put in, the performance of the investments in your pension, and the choices you make with your money when you retire. Unless you swap your pension pot for an annuity at retirement, you aren’t guaranteed a regular income.
There are benefits to keeping your money invested once you stop working, but you need to do your research before you do anything with your pension savings.
There are a number of important characteristics to a defined contribution pension. You can get generous tax relief on your pension contributions, and if you have a workplace pension, your employer usually takes your contribution off your salary before you’re taxed.
Why you might need more than the state pension
Once you hit state pension age, the government will pay you a regular income throughout your retirement – as long as you’ve built up the required number of years of National Insurance contributions.
If you reached retirement age after 6 April 2016, you should get the new state pension of £164.35 a week, which is over £8,500 a year. You’ll have to build up 35 years of NI contributions to get the full amount, although you’ll still qualify for something if you have at least 10 qualifying years.
Experts suggest you’ll need two-thirds of your final salary to maintain your lifestyle in retirement, and the harsh reality is that you probably won’t be able to rely solely on the state pension. The average retired household had a mean disposable income of just over £26,000 in the 2016/17 financial year, figures from the Office for National Statistics shows.
What is a Self Invested Personal Pension (SIPP)?
A Self Invested Personal Pension (SIPP) is a type of personal pension that offers people more flexibility when saving for retirement.
SIPPs are popular with investors looking to reach their retirement dreams, as they give investors more flexibility, transparency and control over their pension investments.
The value of your personal pension depends on how much you put in it, how long you’re invested for, how your investments perform, and how much you’re charged in management fees.
Both you and your employer can pay into your pension, and you can contribute if you’re self-employed. The flexibility of SIPPs allows you to maintain your savings plan if you change jobs or stop working.
Getting the experts to do it for you
After years of saving, you want to know your money is working hard for you and in the right way. Instead of taking on this responsibility yourself, you can get the experts to do it for you.
Investment advice can be crucial for people who don’t have the time, skill, knowledge, or financial confidence to manage their pension investments by themselves.
Discretionary investment management is when a portfolio manager makes the decisions to buy and sell investments on your behalf.
The managers will do many hours of research to identify investment opportunities and will monitor the markets and economic trends daily to ensure portfolios are in the best position to reach their goals.
Getting the experts to do the hard work for you allows you to focus on the important things in life, whether that’s your career, catching up with loved ones, or navigating the pre-dinner homework schedule.
Tax benefits to saving into a pension
The government wants you to save for your future, that’s why there are a number of tax incentives available to those who invest in a pension. You may be eligible for tax benefits when you contribute to a pension, whilst your money is invested and when you retire.
When you invest in your pension, your money can also grow free from income tax and can be sold without incurring a capital gains tax (CGT) charge.
Give your savings a 25% boost
The government gives you tax relief on your pension contributions relative to your income tax band. Basic rate taxpayers get 20% tax relief, higher rate taxpayers get 40%, and additional rate taxpayers get 45% tax relief on their pension contributions.
For example, if you’re charged the basic tax rate, you’ll only need to pay £8,000 into your pension for a £10,000 contribution – the basic rate tax relief is automatically added to your pension investments.
This tax incentive is a real draw to saving for your future, as it essentially gives your savings a 25% boost. Additional and higher rate taxpayers must apply to HMRC for their extra tax relief.
Tax benefits in retirement
Once you reach the age of 55, you can take 25% of your pension pot tax-free, with the remainder being used to provide you with an income throughout your retirement – typically through an annuity or income drawdown.
You decide what you do with your tax-free lump-sum, but it’s important you don’t waste it because once it’s gone, it’s gone.
If you have no need for a big lump-sum, you can choose to take your tax-relief through your withdrawals. As you won’t have taken your tax-free lump sum, this is known as a uncrystallised funds pension lump sum (UFPLS).
If you have any questions about how the Moneyfarm Pension can help you reach your retirement goals, book a call today and one of our Investment Consultants will be in touch.
Can I transfer my pension?
You can transfer money from your other pensions into your Moneyfarm Pension, including from SIPPs and workplace pension schemes, so long as you haven’t started to take income from them. You won’t be able to transfer defined benefit schemes, also known as final salary schemes. Moneyfarm won’t charge you a fee for transferring your pension. It is important you understand any changes in guarantees or benefits and the fees your current provider may charge before transferring your existing pensions to the Moneyfarm Pension.
Can I withdraw from my pension?
You can access your pension from the age of 55, although you aren’t required to start withdrawing from your pension at that age. You can even start taking some benefits if you haven’t finished work, which can be helpful if you’ve had to reduce your hours and need some extra income.
How much can I pay into my pension?
There’s a cap on how much you can contribute to your pension to receive tax relief each year. In the 2018/19 tax year, this limit is £40,000 or your annual salary – whichever is lower. The government applies a tax charge, called the annual allowance tax charge, if the total contributions to your pension savings for a given tax year exceed your annual allowance. Your ‘total contributions’ includes all your personal contributions, any income tax relief from the government and contributions paid by your employer.
Pensions have a lifetime allowance, which is £1.03 million in the 2018/19 tax year. If your total pension savings exceed the lifetime allowance when you decide to take benefits, a tax charge applies, called the lifetime allowance charge.
You can use Moneyfarm’s Pension Calculator to help you work out how much you need to be saving a month to get the income you want in retirement, or start one of Moneyfarm’s regular investment plans.