The pension reforms allow providers to offer new options. If your provider does not offer the option you want, you should be able to transfer your defined contribution pension to another provider at any age up to retirement.
Your State Pension is based on your National Insurance contribution history, and is separate from any private pensions you have.
If the value of your final salary pension is over £30,000, the government requires that you to seek independent financial advice before converting or transferring your pension.
If you have a final salary pension, the government requires people to take independent financial advice if the value of your final salary pension is more than £30,000. IFAs charge for their services, and the cost will vary from firm to firm and may be dependent on your circumstances.
If you have a private pension, whether or not you use an Independent Financial Adviser (IFA) is generally optional.
Some pension policies have a special arrangement known as a guaranteed annuity rate (GAR). It is likely to provide you with a better deal than would currently be available in the annuity market if you were to buy one today, and is therefore a valuable benefit.
There are lots of different types of annuities, and you should be aware of your options when shopping around. Annuity options, which have to be agreed when you purchase the product, can include: Single, Joint, Guaranteed period , Escalating and Enhanced.
You now have the freedom to access your pension savings flexibly. There are several different options which may be available to you with your pension pot. These are:
● Leave your whole pot untouched – you don’t have to start taking money from your pension pot when you reach your retirement age. You can leave your money invested in your pot until you need it.
● Get a guaranteed income (annuity) - you can use your pot to buy an insurance policy that guarantees you an income for the rest of your life, no matter how long you live.
● Get an adjustable income - your pot is invested to give you a regular income. You decide how much to take out and when, and how long you want it to last.
● Take cash in chunks – you can take smaller sums of money from your pot until you run out.
● Take your whole pot in one go - you can cash in your entire pot. One quarter is tax-free, the rest is taxable.
● Mix your options – you can mix different options. Usually you would need a bigger pot to do this.
A defined benefit pension (also known as final salary or career average) is a type of workplace pension. It gives you an income based on your salary, length of service, and a calculation made under the rules of your pension scheme.
A defined contribution scheme is a personal or workplace pension based on how much money has been paid into your pot. They are sometimes referred to as ‘money purchase’ schemes.
When cashing in a pension pot you will usually get 25pc tax free. The remaining 75pc is taxable and it will be added to any other taxable income you have in the tax year. Adding a large cash sum to your income could mean that you move into a higher tax rate. It could also affect your entitlement to any benefits.
It is therefore important that you understand what your income in a particular may be.
Remember that sources of income include:
● The State Pension
● Payments from private pensions (not including any tax-free cash lump sums you may have received)
● Earnings from employment or self-employment
● Taxable State benefits
● Other income, such as money from investments, property or savings
Pension providers will often have to deduct emergency tax when pension payments are made, which may result in an over or underpayment of tax. Your provider should give you information on how to claim back any overpaid tax.
If you have more than one pension pot you can choose to take each pot at different times, rather than taking them all at once. For example, you may not need to access all of your money now or your pensions may have different selected retirement ages.
When taking money from a pension pot you can usually take up to 25pc of it as a tax-free lump sum.
If you do this, you must make a decision on the remaining 75pc within six months; you can’t then leave it untouched. However, most providers will likely want you to make a decision before you have taken the 25pc tax free cash.
Drawdown is a way of receiving a regular or irregular income without buying an annuity. You can still take up to 25pc of your pot tax free cash sum, and the remaining part of your pot is then invested to give you a regular income in retirement, which is taxable. You’ll probably need to be involved in choosing and managing your investments.
Alternatively, a financial adviser can help create a plan with you for how to invest your money. They can advise you on how much you can take out to make the fund last as long as possible.
Whatever your age. The state pension age keeps rising. Young people now face working until their 70s and beyond before they will qualify - and get less than they expected.
During your working life, you put a bit of cash away from your earnings each month and that builds up to create a pot of money to see you through retirement. Then you cash them in and buy a pension income.
Tax relief on pension contributions is a generous Government giveaway. Every £100 you put into a pension only costs you £80 with tax relief. For higher-rate taxpayers it’s even better.
In your 20s, or as soon as you start work, is the time to start the long-term savings bug. Andrew Tully says to build up a £100,000 pot by age 65, you’ll need to save £91 a month from age 25, £148 from age 35 and £266 from age 45. This is because of compound interest – where you earn interest on interest over the years.
Don’t opt-out of a workplace pension – it’s turning down “free money” from your employer. Under auto-enrolment, you make contributions into your workplace pension and your boss chips in to boost savings.
The current minimum legal contributions into workplace schemes are 1% from workers and 1% from bosses. This increases to 3% from workers and 2% from bosses in April, and to 5% from workers and 3% from bosses in 2019. Some firms will match employee contributions up to a higher level.
Don’t leave your hard-earned cash languishing. Keep an eye on it to ensure you’re on track to build up the funds you will need. Take notice of annual statements so you know where you stand and can decide if you need to chip in a bit more.
Workers in their 50s still have time to build up a bit of a nest egg. Chances are you’ll be working until your late 60s, so there is time. Every £1 saved into a pension will give you that plus a bit more in retirement.
You’ll need to sort out your own pension savings. Under 40s can use the Lifetime ISA, which gets a 25% Government top-up on up to £4,000 each year, until age 50. Over 40s will need to set up a private pension. .
If you get a shop-bought coffee each day at £2-plus a pop, giving up one or two a week will free-up cash to save for your older age. Once you start looking at small ways like this to make savings, you’ll be well on your way to a more secure financial future.
Fees charged by pension providers can vary and eat into your funds. What seems like a small change could make a big difference. For example, reducing your annual provider fees by just 1% could mean £25,000 more in your pot over 20 years. Check the market for schemes with lower fees and think about switching.
Ensure your pension savings are working hard for you. Check the funds you’re invested in match your attitude to risk. Keep an eye on how your savings are growing, and move funds if you think you can achieve a better return.
The pensions freedoms put you in control of when and how you access your savings from the age 55. But be wary of dipping into your pot too soon.
Most of us will work for a number of employers and it can be easy to lose track or forget about funds from past jobs. Get free help to track down lost pensions from the Government at gov.uk/find-pension-contact-details .
Do not transfer your pension to any firm that's not regulated by the FCA.
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