Pension schemes

Whether it’s a long way off or just around the corner, having a plan in place for your retirement can help you get the lifestyle that you want. The State pension alone won’t be enough to ensure a comfortable retirement so it’s important to review your options as soon as you can to make sure you can afford life’s little pleasures once you retire. When it comes to planning for retirement, time is your friend. The earlier you start, the longer your money has the potential to grow.

Occupational pension schemes
These schemes are also called company pension schemes. It’s a scheme set up by an employer to provide pension or death benefits for its employees. An occupational pension can provide pension benefits on a money purchase, defined benefits, cash balance or hybrid arrangement basis. The two most common arrangements for occupational schemes are:

• defined benefits
• money purchase

If you leave your job you’ll normally have to stop building up pension savings in your employer’s scheme. Your employer doesn’t have to let you join their scheme. However, from October 2012 employers had to start enrolling their employees into a workplace pension.

Workplace pensions
A workplace pension is a way of saving for your retirement that’s arranged by your employer. A percentage of your pay is put into the pension scheme automatically every payday. In most cases, your employer and the Government also add money into the pension scheme for you. The money is used to pay you an income for the rest of your life when you start getting the pension. You can usually take some of your workplace pension as a tax-free lump sum when you retire.

If the amount of money you’ve saved is quite small, you may be able to take it all as a lump sum. 25 per cent is tax free but you’ll have to pay Income Tax on the rest. You can’t usually take the money out before you’re 55 at the earliest – unless you’re seriously ill.

October 2012 saw the start of the new pension auto-enrolment system, which is expected to take six years to be fully rolled out.  Workers employed by the UK’s largest firms (those employing more than 120,000 people) from 1 October 2012 have started to be automatically enrolled into company pension schemes. Between now and 2018 all other employers will have to ensure that UK-based workers aged over 22 years and earning a minimum of £9,440 (for the current 2013/14 tax year) are also enrolled into a pension.

Personal Pension schemes
A personal pension scheme is set up and run by a regulated financial organisation such as a bank or insurance company. You can pay regular or lump sum contributions to the scheme, who will invest it on your behalf.

Anyone can start paying into a personal pension scheme – you don’t have to be in employment. If you’re an employee your employer may pay into your personal pension scheme – but they don’t have to.

Personal pensions are money purchase arrangements so the amount of pension you’ll get depends on:

the amount of money paid into the scheme how well the investment funds perform the ‘annuity rate’ at the date of retirement – an annuity rate is the factor used to convert the ‘pot of money’ into a pension

Carry Forward of unused reliefs
You may be able to contribute in excess of the Annual Allowance of £50,000 and receive tax relief at up to 45 per cent using Carry Forward if you have contributed less than £50,000 in any of the previous three tax years. This is the upper limit placed on the total value of contributions that can be paid to your pension scheme in any one year and benefit from tax relief. As this is a potentially complex area, particularly where Defined Benefit schemes are concerned, professional financial advice should be sought.

Annual and Lifetime Allowance reducing
As of 6 April 2014, the Annual Allowance for retirement funding is reducing to £40,000, while the Lifetime Allowance is reducing from its current £1.5m ceiling to £1.25m. The Lifetime Allowance is the maximum pension fund allowed free of tax. The Annual Allowance reduction represents a significant opportunity to fund a higher level of pension contributions prior to this reduction. The reduction in the Lifetime Allowance means that professional advice is more important than ever to ensure that you are optimising your retirement planning, and are fully informed about the latest Lifetime Allowance protection opportunities.