Why is this area important?
Retirement Planning can never begin soon enough. We offer you guidance to ensure your future income, covering all the options available to you. In keeping with your circumstances, we offer investment and fund selection advice from before you make your first pension contribution until the day you choose to take the benefits, and thereafter.
What solutions are there?
There are many options available to you when considering this area of financial planning. The need for sound retirement planning is ever present as increased life expectancy means we are now all living longer. As most people still choose to retire around the age of 65, it is necessary to make sure you have made adequate provision to provide an income when you choose to reduce your working hours, or retire full time.
To achieve the goal of building a pension fund that you can utilise towards the provision of an income in retirement requires careful planning. The tax benefits associated with retirement planning are numerous, further details of which can be found by clicking on the tab ‘Tax Planning’. Many individuals are fortunate enough to be able to join a company pension scheme, which often means that your employer may make contributions to your pension fund. For those that are unable to join a company pension scheme, there are numerous alternatives available to help achieve the goal of building a pension fund that will provide an income in retirement.
Please find below a guide to the different types of retirement products available.
Pre Retirement
Company Pension Schemes- Final Salary, Money Purchase, Group Personal Pension, Group Self Invested Personal Pension (GSIPP), Group Small Self Administered Scheme (GSSAS), Section 32 Buy-out Bond.
If you are fortunate enough to have been able to join a company pension scheme, it is likely that you hold one of the aforementioned products. Companies often choose to contribute to these pension schemes, to help their employees fund their retirement planning. In most cases it is best to join your company pension scheme if you are able to do so.
Personal Pension
This is the most common pension product for those who may not have been able to join a company pension scheme, or indeed may be self employed. Provided by the major insurance & investment companies, personal pensions offer individuals the opportunity to purchase funds according to their risk profile and investment appetite.
Stakeholder Pension
A stakeholder pension is a form of personal pension that has to satisfy a number of criteria to have the designation of 'stakeholder'. Initially formulated by the government to provide consumers with an instantly recognisable 'fair deal', stakeholder pensions have strict limits on the annual management charge applicable, are not allowed to charge individuals to transfer monies in or out, have low minimum levels of contribution and must be run for the benefit of their members. Legislation also states that any UK based employer with 5 or more employees, has to offer at the very least a stakeholder pension to their staff.
Self Invested Personal Pension (SIPP)
SIPPs are a form of personal pension; however they allow a far greater selection of investments to be placed within the pension wrapper. With the cost of owning a SIPP having significantly reduced, it now seems to be a more popular choice for those who wish to be able to have the widest range of investment choice, within a similar charging structure to that of a personal pension.
Retirement Annuity Contracts (RACs)
RACs are also a type of personal pension plan that individuals could take out before 1 July 1988, at which point the current form of Personal Pension was introduced. RACs were only available to those in employment where there was no access to an occupational scheme and to those in self-employment, provided they had earnings subject to UK taxation. RACs differed slightly to the personal pensions in terms of the benefits they provided, often more advantageous to personal pensions, however since April 2006, RACs have been brought in line with personal pensions, and so many of the advantages once enjoyed by RAC holders do not now apply.
At Retirement
Tax Free Lump Sum
Most pension schemes allow you to take an amount of money from the fund at retirement, which is tax free. This is often referred to as a tax free lump sum, and can, depending on the scheme be up to 25% of the overall value of the fund at retirement age.
Annuities
At retirement age, depending on what type of pension product is used, one option for the pension fund is to utilise it to purchase an annuity. This is the product that pays you an income for the rest of your life. There are various options that can be built into this type of product, such as securing an income that is level or one that escalates, or whether to build in guarantees for the provision of a spouses’ pension upon death during the guaranteed period. You may also be eligible to receive an enhanced annuity rate if you suffer from poor health, or are a smoker.
Open Market Option
Many providers of pension products also provide annuities. Due to government legislation however, you have to be offered the right to what is known as the ‘Open Market Option’. This means that we are able to search the whole market for you, to see who will provide you with the best income for the rest of your life, based on your requirements. This is a very important decision, as once you have committed to an annuity, you are unable change this. Based on our experience, very rarely is the annuity offered to you by your chosen pension provider the best available when compared with the whole of the market. This essentially means that more income could be obtained for you elsewhere, which, when considering that many people spend up to a third of their lives in retirement, small differences in the rates offered initially can compound to make quite a difference over the longer term.
Income Drawdown- Unsecured Pension- Alternatively Secured Pension
For some individuals, the thought of purchasing an annuity does not appeal to them and they would rather leave their pension funds invested with the potential for their fund to grow. For these individuals income drawdown can be employed. Their pension fund remains invested and they are permitted to take an income based on the Government Actuarial Department’s (GAD) figure. They can then choose to take between 0% and 120% of GAD as an income. The level of income can be varied according to their requirements. At age 75 a decision has to be made to either move from an Unsecured Pension to an Alternatively Secured Pension (ASP) or to purchase an annuity. An ASP is similar to an Unsecured Pension however the amount of income taken must be between 35% and 90% of GAD. On death there are very high potential tax implications for the pension fund that makes an ASP unattractive to most individuals.
