Types of Pension

Brief explanations of the different types of UK pensions are given below.

Basic state pension

Although an entitlement for most people, the amount received from the basic state pension will depend on the amount of national insurance contributions paid. You can claim the basic state pension if you're:

- a man born before 6 April 1951

- a woman born before 6 April 1953

Full state pension allowance

The full basic state pension as at 5th December 2018 is £125.95 per week but there are ways you can increase your state pension up to or above the full amount. For more information please visit - https://www.gov.uk/state-pension/what-youll-get


Annual pension allowance

Annual pension contributions have a new limit attracting full tax relief. This limit is the greater of £3,600 and 100% of salary, subject to the annual allowance (£40,000 in the 2018/2019 tax year). Any contribution over the annual allowance will be subject to a tax charge.

Lifetime allowance

As well as an annual pension allowance charge, there is a possible lifetime allowance charge if total pension funds exceed the lifetime allowance when pension benefits are taken. The lifetime allowance for 2018/2019 is £1,030,000.

The lifetime allowance charge is applied to the excess over the allowance. This can apply in two different ways or both depending on how the excess is taken. The individual charges are;

• 25% if taken as income, and
• 55% if taken as a lump sum

It is unlikely that there will be much difference because, if someone takes the excess as income, he will be charged income tax on top of this tax charge, more than likely at 40%.


Pension benefits
You can take pension benefits between ages 55 and 75. Normally these will be in the form of 25% of the fund as tax free cash, and the rest applied to produce an annual pension, although other alternatives are now available.


Level and bases of, and reliefs from taxation are subject to change.


Occupational pension schemes

Employers can set up an occupational pension scheme for their employees. An occupational pension scheme can be offered to both public and private employees.

Public sector occupational pension scheme
Public sector schemes typically offer pension accrual of 1/80th of final remuneration for each year of service up to a maximum of 40 years plus a tax free lump sum of up to 1.5 x final remuneration or a career average annual earning calculation.

Private sector occupational pension scheme
Private sector schemes can be either final salary schemes known as defined benefit schemes or money purchase schemes known as defined contribution schemes.

Executive pension scheme

Many directors of small to medium sized family businesses make use of an executive pension scheme. Executive pension plans are similar to occupational pension schemes in that they are subject to occupational pension scheme rules.


Types of occupational pension scheme


Final salary schemes

Final salary occupational pensions schemes offer a guaranteed pension amount, usually based on salary and time served with an employer.

Typically accrual rates of 1/80th or 1/60th of pensionable salary for each year of pensionable service are found.

E.g. Fred Smith retires on a salary of £10,000pa after 20 years in a 1/60ths scheme. His pension is 20/60 x £10,000 = £3,333.

Money purchase scheme

With a Money Purchase occupational pension plan, the pension contributions are invested and the final pension is based on the investment performance of the fund. There is no guarantee.

Individual Contributions

Individuals can contribute as much as they want although there are limits on the amount of contributions that will receive the full benefits of tax relief.

Any contribution that is not paid by the employer is classed as a member contribution even if a third party has made the contribution. Tax relief is given according to the member's situation; i.e. make sure that tax relief at source applies if the member is a non- or starting rate taxpayer. An example of this is a grandparent paying a pension contribution for his/her grandchild.

Employer Contributions

Just like individual contributions, employer contributions are also unlimited. Full tax relief will be available without limit subject to the local inspector of taxes. However, there will be a tax charge on the member where total contributions are above the annual allowance.

Eligibility

Any member of a registered occupational pension scheme can make contributions to it. However, to be eligible to gain tax relief, the contribution must be made by an active scheme member who is also a relevant UK individual. To qualify as a relevant UK individual, the scheme member must meet one of the following criteria:

  • Have relevant UK earnings chargeable to income tax
  • for that tax year
  • Is resident in the UK at some point in that tax year
  • Was resident in the UK at some point during the five
  • tax years immediately before the tax year in question
  • and was also resident in the UK when he/she joined
  • the pension scheme
  • Has general earnings from overseas Crown
  • employment subject to UK tax
  • Is the spouse of an individual who has, for the tax year, general earnings from overseas Crown employment subject to UK tax

Pension Allowances

Annual Pension Allowance

Since A-Day, annual pension contributions have a new limit attracting full tax relief. This limit is the greater of £3,600 and 100% of salary, subject to the annual allowance (£40,000 in the 2018/2019 tax year). Any contribution over the annual allowance will be subject to a tax charge. We will explain this in further detail later in this bulletin.

Lifetime Pension Allowance

As well as an annual allowance charge, there is a possible lifetime allowance charge if total pension funds exceed the lifetime allowance at when pension benefits are taken. The lifetime allowance for the 2018/2019 tax year is £1,030,000.

The lifetime allowance charge is applied to the excess over the allowance. This can apply in two different ways or both depending on how the excess is taken. The individual charges are;

  • 25% if taken as income, and
  • 55% if taken as a lump sum

it is unlikely that there will be much difference because, if someone takes the excess as income, he will be charged income tax on top of this tax charge, more than likely at 40%.

Additional Voluntary Contributions (AVCs)

It is now compulsory for companies to offer employees the opportunity to invest additional contributions into their occupational scheme where there is one, in order to boost retirement benefits.

Under existing revenue limits and since A- Day, if you are a member of an occupational pension scheme you can invest up to 100% of your total remuneration subject to the annual allowance.


Tax Reliefs & Contribution Limits (tax year 2018/2019)

To receive full benefits of tax relief , pension contributions have to remain within a certain limit. Currently the limit is the greater of £3,600 and 100% of salary, subject to the annual allowance. Any additional contribution over the annual allowance will be subject to a tax charge. This is based on the tax year 2018/2019.

Levels and bases of, and reliefs from taxation are subject to change.

Free Standing Additional Voluntary Contributions (FSAVCs)

Free standing additional voluntary contribution schemes (FSAVCs) were introduced in 1987.

These are run by a pension provider rather than the trustees of the employee's pension scheme. The big advantage tends to be the wider choice of investment available.


FSAVCs tax relief and contribution limits  (tax year 2018/2019)

To receive full benefits of tax relief , pension contributions have to remain within a certain limit. Currently the limit is the greater of £3,600 and 100% of salary, subject to the annual allowance. Any contribution over the annual allowance will be subject to a tax charge. This is based on the tax year 2018/2019.

Level and bases of, and reliefs from taxation are subject to change.

SIPP Pension plans

For many people a SIPP pension has become an attractive and Tax efficient method for long term saving.

Pension reform has widened the investment options available to the individual and has relaxed the rules which govern the purchase and sale of assets into a pension plan.

SIPP Pension Benefits

Another major change introduced from April 2006 is in the way individuals can take benefits or draw upon assets within a pension. When an individual wishes to retire, there is greater flexibility and choice when it comes to deriving an income.

Individuals now have the option of pension drawdown as well as the purchasing of an annuity - this gives greater control over the initial level of income derived and income flexibility during retirement.

A SIPP will allow regular and lump sum cash payments, and you will also be able to transfer other pension arrangements into the scheme. If you are employed, your employer can also pay into the plan. In addition SIPPS will allow investments from a wide range of sources including Commercial Property, shares and unit trusts.


Annual Allowance:

Since A-Day, annual pension contributions have a new limit attracting full tax relief. This limit is the greater of £3,600 and 100% of salary, subject to the annual allowance (£40,000 in the 2018/2019 tax year). Any contribution over the annual allowance will be subject to a tax charge. We will explain this in further detail later in this bulletin.


Lifetime Allowance:

As well as an annual allowance charge, there is a possible lifetime allowance charge if total pension funds exceed the lifetime allowance at when pension benefits are taken. The lifetime allowance is currently £1,030,000 (2018/2019 tax year).


State Earnings Related Pension Scheme (SERPS)

The State Second Pension (S2P) replaced SERPS with effect from 6 April 2002. Only those who have been employed between 1978 and April 2002 are entitled to SERPS subject to their National Insurance contribution record. Those who have always been self-employed are not.

  • Who can invest in a personal pension? Open or Close

    You can get a personal pension whether you're employed, self-employed or out of work as long as you are:

    • 16 or over
    • A UK resident
    • Happy to leave your money invested until you retire

    If you want to retire on more than the state pension but don't have a company pension at work, a personal pension is a great option.

  • Taking your pension benefits Open or Close

    Firstly you can't get your hands on your pension until you're at least 55 years old, which is good because it gives you time to build up a bigger pension, without the temptation to dip into your savings.

    When you take your benefits you can normally choose to take up to a quarter of your benefits as a tax-free cash sum.

    You may want to use the rest of the money you've saved in your pension to buy an annuity. An annuity is an investment that guarantees to pay you a regular income for the rest of your life, no matter how long you live.

    Please remember, the amount of income provided by your pension will depend on a number of factors, including investment returns and annuity rates when you retire.

  • How much can I save? Open or Close

    A little now makes a big difference later- the golden rule is to invest the most you can afford, and the earlier you start the better. Even a modest amount saved now can make a big difference later.

    You get tax relief on everything you put away, up to 100% of your annual earnings (and also subject to an upper annual allowance of £40,000*).

    Even if you're a non tax payer you can still pay into your personal pension, and get tax relief on up to £2,880 of contributions each year.

    *Please note, you don't get tax relief on payments above £40,000, in fact you will be taxed on them. If you have unused allowance from previous tax years, you may be able to pay in more than this. To find out more, please see Questions & Answers. Also remember, this information is based on our current understanding of taxation law and HM Revenue & Customs practice in the UK. The amount of tax relief you receive depends on your personal circumstances and may change.

  • How much can I pay in? Open or Close

    You can pay in anything from £1 upwards. You get tax relief on everything you put away, up to 100% of your annual earnings (subject to an upper annual allowance of £40,000). If you are able to save more than £40,000 a year, you don't get tax relief on payments above that, in fact you will be taxed on them. If you have unused annual allowance from previous tax years, you may be able to pay in more than this. Please see below.

  • Can I pay in more than £40,000 in one year? Open or Close

    Yes, but any contributions above this will normally be taxed.

    You may be able to avoid this by carrying forward any unused annual allowance from previous tax years. There are some rules around this, you can only go back three years, you must have been a registered member of the scheme in the tax year you are carrying forward from and you can only carry forward up to the £40,000 limit in each tax year.

    Don't forget this includes any contributions from an employer and increases in value of any other pension savings you may have.

    If you'd like to find out more please seek advice from a tax specialist or financial adviser before investing - to ensure you don't incur tax charges you weren't expecting.

  • Can my employer contribute? Open or Close

    Yes, their payments would form part of your total contribution limits.

    If you'd like your employer to contribute, just let us know and we'll send you a form making it easy for them to do.

  • Can I save in other pensions too? Open or Close

    Yes, you are allowed to save in as many pensions as you like. There used to be rules concerning company directors and occupational schemes and salary limits, but these have now been removed.

    If you already have a pension which you could make further contributions to, you should speak to an IFA.

  • Can I transfer other pensions to my new pension? Open or Close

    Yes, you can transfer other pensions into a new pension, however, you would need to make sure it was the right thing for you to do. If you would like more information please contact us.

  • Can I start a pension if I plan to retire within five years? Open or Close

    Yes, you can. But if you haven't started a pension yet and are hoping to retire within five years time, we strongly recommend you seek independent financial advice, so you can decide on the best options available to you at this time.

  • How do I claim the tax relief? Open or Close

    Whether you are employed, self-employed or not employed, we claim basic rate tax relief for you and invest it in your pension.

    If you pay income tax at the higher rate (or additional rate that applies for those with an annual income above £150,000) you can claim any extra tax relief you are due from the HMRC in your annual tax return.

  • What happens if I change jobs? Open or Close

    The first thing is to find out if your new employer offers a company pension, and whether they contribute to it. If so, you should join, so you don't miss out on any payments they're offering. You can also keep your personal pension, and keep paying into it if you wish.

    If you become self-employed or your new employer doesn't offer a pension scheme, it's a good idea to keep paying into your personal pension so your retirement savings stay on track.

    Whatever you choose to do, please let us know if you've changed jobs.

  • What happens if I'm off work? Open or Close

    If you're off work but are still being paid (e.g. paid maternity leave or sick leave), you can continue to pay into your pension and you'll still receive tax relief on your payments (on up to 100% of your annual earnings and also subject to an upper annual allowance of £40,000). If your employer is paying into your pension, you'll need to check with them whether they'll continue to contribute while you're off work.

    If you have time away from paid work, remember you can stop payments into your personal pension if you need to. You can start saving again whenever you wish. If you do make payments into your pension you'll still receive tax relief on up to £2,880 of payments each tax year, even if you have no earnings for that tax year. You can pay in more than that if you wish but you won't receive tax relief on the extra amount.

  • What happens if I stop work altogether? Open or Close

    Even if you're not earning you can still pay into your personal pension and receive tax relief on up to £2,880 of payments each tax year. You can pay in more than that if you wish but you won't receive tax relief on the extra amount.

    If you can no longer spare the money you can stop your payments into your pension. You can start saving again whenever you're ready.

  • What happens to my savings if I die before I retire? Open or Close

    They will be paid to the beneficiaries you named on your application. If you need to update your beneficiaries at any time, please contact us.

  • What is the earliest I can retire? Open or Close

    The earliest you can currently take your private pension is your 55th birthday, but state pensions will vary and you should check with directgov.com as to what age they will be able to claim state pension.  You can retire at any age but only draw pensions at specific ages.

  • What happens when I 'cash in' my pension fund? Open or Close

    You can normally take up to a quarter of your savings as a tax-free cash sum. The rest is may be used to buy you an income in retirement, called an annuity.

  • Are there any risks I need to know about? Open or Close

    Investing in stock market shares is not without its risks. They can rise significantly in value over many years, go into periods of decline, or fall suddenly in value, with no guarantees you will get back the full amount you invest.

    The key point to remember is that saving into a pension is a long term investment, and the longer you remain invested in the stock market the better you tend to do.

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

  • Remember... Open or Close

    The amount of pension income provided by your retirement fund will depend on a number of factors, including age, investment returns and annuity rates when you retire

  • Annuities explained Open or Close

    Annuities explained

    What is it?

    A lifetime annuity pays a guaranteed income for your life from the funds you have built up in your pension plan. Your annuity provider will pay you a regular income taxed in the same way as earnings. The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors, the type of annuity and the options you select. You should also be aware that once you have purchased an annuity you cannot cash it in or make changes to your selected options.

    Annuity options include:

    Single-life or joint-life - A joint life last survivor annuity pays out until the second life dies. It is possible for the annuity to continue at the same level to a survivor but most couples elect for a survivor’s income of between 1/3rd and 2/3rds of the original amount. It is not necessary for a couple to be husband and wife and any person of either sex may be eligible for a survivor’s pension, although it may be necessary in such circumstances to show financial dependency (the rules on who can be paid a survivor’s pension were relaxed from 6th April 2015 although annuity providers will have their own restrictions in place). With some pension schemes a spouse’s pension must be provided. The higher the level of survivor’s pension included, the lower the starting income will be.


    Frequency of Income - You may select at the outset how often you want to receive your income payments. Most people choose monthly, but you can be paid quarterly, half-yearly or annually.


    Income paid in advance or in arrears - Payments can be made either in advance or arrears. If you opt for monthly income and purchase your annuity on 1st January and you receive your payment on that day, you are being paid in advance. If your first payment is not made until 1st February, you are being paid in arrears. Payments made annually in arrears would give the highest income figure but the first payment would not be received until a year after annuity purchase.


    With Or Without Proportion - When you die, an annuity with proportion will pay a proportionate amount to cover the period from the last payment until the date of death. This is most valuable when income payments are made on an annual basis. This option is only available for payments made in arrears. Without proportion represents the cheaper option.


    Level, Escalating or Decreasing - A level annuity pays the same amount of income year after year. It pays a higher income compared to the initial starting income available under an escalating annuity, which will take a number of years to catch up and exceed a level annuity. An escalating annuity, on the other hand, is designed to increase each year. The greater the level of escalation chosen, the lower the initial income will be. It is possible to select a fixed rate of increase each year normally in the range of 3% to 8.5%. Alternatively, you can choose to link increases to reflect changes in the Retail Prices Index (RPI) - however, your income is not guaranteed to increase each year as the RPI may not rise and if it did fall, so might your income. Some annuities arising from occupational pension schemes can also escalate by Limited Price Indexation (LPI). LPI means your income increases each year in line with the RPI but only up to a maximum of 5% or 2.5% depending when the pension was earned. It is also now possible to purchase an annuity that has the facility to be decreased.


    A guarantee period - If you select a guarantee period and you die within the period chosen, payments will continue for the balance of time remaining. Normally the guarantee period will be either 5 or 10 years although providers are free to offer their own choice of guarantee periods as there is no longer a maximum period set by the government. Remaining instalments would be paid as an income to the nominated beneficiary and would be tax free if you die before age 75 and subject to income tax at the beneficiary’s marginal rate(s) if you die after age 75. The longer the guarantee period, the more costly the option is.


    Annuity protection lump sum death benefit - This option allows for a return on death equal to the difference between the cost of annuity purchase and the gross income payments received. If you die before age 75 the payment to your beneficiaries will be tax free and if you die aged 75 or over it will be taxed at the beneficiary’s own income tax rate(s).

    Eligibility:

    • - You must be aged 55 or over or, if younger, meet ill-health conditions.
    • - The annuity must be purchased using funds from your uncrystallised rights held in a money purchase pension or from drawdown funds.

    Some annuity providers offer annuities which pay you a higher than normal income if you have a medical condition(s) which can affect your normal life expectancy. These are called impaired life annuities.

    An enhanced annuity may be available if you smoke regularly, are overweight, if you have followed a particular type of occupation or live in certain parts of the country.


*Please note we have updated our email address and trading style to LenRose Wealth Management but still under Active Financial Partners Ltd and part of the Harwood Wealth Management Group PLC.

The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.


Jonathan Hales

Independant Financial Advisor

This email address is being protected from spambots. You need JavaScript enabled to view it.

T: 01795 477744

M: 07886 516087

phone 01795 477744
mobile 07886 516087

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