How much do I need to invest to get a decent level of pension income in retirement?
At our initial meeting we will establish your current level of income, when you are planning to retire and the level of disposable income you have available. Pension planning is all about getting your money to work for you – utilising the available tax benefits and accruing a pot of money that you will use to fund your income in retirement. Clearly the larger the pension pot is the more income you will have available. Because of the tax benefits that are provided there are restrictions on how your pension pot can be used in retirement. As a guide a typical company pension scheme may require an employee to contribute 5% of their salary before they can join. They would also benefit from contributions from the Employer which is unlikely to be the case if you are funding your pension yourself.
What are the tax benefits of contributing to a personal pension?
Subject to the lifetime and annual contribution limits, you will receive tax relief on all pension contributions at your highest marginal rate. If you are a basic rate taxpayer this will mean that for every £80 you contribute to a personal pension, £100 will actually be invested. For a higher rate tax payer an additional £20 (40%) or £25 (45%) can also be claimed. When you come to retire you can currently draw 25% of the accumulated fund value as a tax-free lump sum – referred to as the ‘pension commencement lump sum’.
What is the Lifetime Allowance?
You can save as much as you like towards your pension but there is a limit on the amount of tax relief you can get. The lifetime allowance is the maximum amount of pension saving you can build up over your lifetime that will benefit from tax relief. If you build up pension savings worth more than the lifetime allowance you’ll pay a tax charge on the excess.
What is the earliest date that I can draw my retirement benefits?
The earliest date you can elect to draw your pension benefits is ‘age 55’. Whilst there are tax benefits to funding for your retirement, because of the age restriction it is very important that we establish what you can afford to invest for your retirement at the outset. We also need to ensure you have sufficient monies elsewhere ‘in case of need’.
What is the difference between a Personal Pension and a Stakeholder Pension?
A stakeholder pension has to meet criteria set by the Government relating to minimum contributions, charges and terms and conditions. A Personal Pension does not have the same restrictions. As such, a Stakeholder Pension will normally be cheaper to administer than a Personal Pension but will usually have a only a small set number of funds in which you can invest.
What is a SIPP?
A Self Invested Personal Pension (SIPP) is a type of Personal Pension Plan. It works in the same way for contributions, tax relief and eligibility. The main difference is that the SIPP has a more flexible approach to investments. A conventional personal pension generally involves the plan holder paying money to an insurance company for investment in an insurance policy. This means the money is invested with relatively little choice or freedom from the plan holder.
A SIPP allows the plan holder much greater freedom in what to invest in and for the plan to hold these investments directly.This option is popular with investors who are more interested in their investments being actively managed by a professional investment adviser and perhaps accessing commercial property within the arrangement. SIPPs also offer greater flexibility when it comes to taking your pension benefits as a pension. The most obvious benefit here is Income Drawdown.
What is an Annuity?
An annuity is a financial product where you exchange a lump sum for income. In the case of pension schemes, you usually exchange your pension fund for an income payable for the rest of your life, often called a compulsory purchase annuity. Rates are set by insurance companies and are typically expressed as a sum per £10,000 or £100,000 of lump sum. So, for example, a 65-year-old man might be quoted a rate of, say, £350 income for every £10,000 of lump sum.
The major drawback with annuities is that once you’ve handed the money over, you can’t get it back. If you die soon after buying the annuity, then the income you receive won’t be anywhere near the amount you’ve paid in. However, there are steps you can take to protect yourself.
What are the alternatives to buying an Annuity?
When you reach retirement, you can purchase an annuity or enter into income drawdown via Capped Drawdown or Flexible Drawdown. You can take up to 25% of your fund as a tax-free cash lump sum and leave the remainder of your pension fund invested for capital growth. In the meantime, you can take income as and when you need it from the fund; subject to certain Inland Revenue limits. However, you are not obliged to take any income at all if you do not need it. Whilst you do not lose the right to purchase an annuity, you are no longer obliged to purchase an annuity in the future either.
How much will it cost to start a Pension?
Our first meeting is always provided ‘free of charge’ and this is where we will assess your needs and discuss your retirement objectives. When we meet we will tell you more about how our different levels of service are structured and agree the most suitable investment strategy for you. We offer four levels of service – ‘Bronze’, ‘Silver’, ‘Gold’ and ‘Platinum’ and they offer different levels of ‘advice time’ and are priced accordingly. We can usually provide discounts on the fund management costs of your investment that help offset the annual costs of our services. Our annual costs range from 0.50% to 1.00% depending on the amount you wish to invest and the level of service you require. Our initial charges for independent financial advice are calculated at a rate of £200 an hour or £50 an hour if it is just for administrative work.
What happens to my pension fund if I die before I retire?
If you die before you start receiving your retirement income, you will normally receive the full value of your fund as a lump sum. You can specify the person or people you would like to receive all or part of a lump sum and this speed up the payment process. You can change the people named at any time by writing to your pension provider. Your wishes are not binding, but the pension provider will bear them in mind when making the payment.
If you die before your 75th birthday, any lump sum paid on death will count towards your lifetime allowance. However, instead of your fund being paid out as a lump sum, it can be used to give your dependants an income for as long as they live – and any benefits paid in this way will not count towards your lifetime allowance.
What would I get by way of a State Pension?
The basic state pension is worth £113.10 a week for a single person in 2014/15 (or £5,881 a year).
If you’re married, and both you and your partner have built up state pension, you’ll get double this amount – so £226.20 a week. But if your partner has not built up their own state pension, they’ll still be able to claim a state pension based on your record.
If your income is below a certain level, you can boost it by claiming pension credit. This will take your income up to £148.35 a week for a single person and £226.50 a week for a couple (in 2014/15).
The actual amount of Basic State Pension, State Earnings-Related Pension scheme (SERPS) and Second State Pension (S2P) you receive will depend on the National Insurance contributions you have paid during your working life. However, there is likely to be a large gap between your income before retirement and the State Pension you receive when you retire. The good news is that starting a Personal Pension Plan will not affect your entitlement to the Basic State Pension.
Please be aware that investments can fall as well as rise, and that you may not get back the full amount invested. The price of investments we may recommend may depend on fluctuations in the financial markets, or other economic factors, which are outside our control. Past performance is not necessarily a guide to future performance. Specific warnings relevant to the investments, investment strategies or other products we recommend will be confirmed to you in your suitability report.
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