Your pension plan is probably your biggest investment or asset, after your home. So what are the most important things to consider.
So it makes financial sense to get actively involved with it. For most people, its complete inertia as the idea of accessing it or retiring could be many years down the road.
So decide today to make a conscious decision to get actively involved with it.
Whether that is in your 30’s as you are staring out.
During your 40’s when you are in the accumulation state.
Or in your 50’s when you may be putting plan in plan to access.
It may be one of the most valuable investment decisions you make towards securing a better future in your later years.
Under current UK rules, you can access a Defined contribution (DC) or defined benefit / final salary (DB) from age 55. Known as the minimum pension age (MPA) although this will soon increase to age 57 with effect from April 2027.
You can access a pot if you have a protected age or serous ill-health condition. Usually at the trustees or pension administrators discretion.
So, firstly what type of pension do you have !
Defined benefit:
Also known as final salary. It is usually based upon the length of service, accrual rate and your salary. So the longer you work for that employer, the greater the income payable. Which is classed as guaranteed or defined.
The risk is on the sponsoring employer or trustees running that scheme. To honour the pension benefits due at normal retirement date (NRD).
The options are limited, but they will pay you a guaranteed pension for lifetime with annual increases. Plus a spouse’s pension (normally 50%) if married for as long as they live.
Defined Contribution (DC):
This type of pension could be personal or employer based. Whereby you contribute a set amount each month and the government will add tax relief into the account on your behalf.
Or done through your employer, and you pay in a % of your salary and your employer will add free money also as a %. Again with tax-relief added to the pension on your behalf but claimed automatically.
You then buy funds within the plan and it increases in value. In later years you then access via buying an annuity, drawdown, series of lump sums or full encashment.
It goes up and down on a daily basis and the pot value isn’t guaranteed. Plus the risk is on the member to make that decision.
So what actions should you consider !
1. what is the pension scheme selected retirement date.
When a pension is set up it will usually have a default age or selected retirement date.
In the past it was normally set to age 60 or 65. But it recent times it is now set to match state pension age so 66 or 67.
Although as stated above you are able to access a pension anytime form the age of 55 under current legislation.
So firstly check your paperwork for the selected retirement date. As this date will normally determine where your monthly contributions are invested.
You are able to transfer or consolidate your pensions at any age. You shouldn’t be restricted, check out my blog post for more information on transfers: https://moneyminted.co.uk/how-to-consolidate-your-pensions
2. Do the pension have any special features
Most modern workplace and private pensions are relatively simple. But in the past for older schemes they usually had some valuable benefits as the pension landscape and the options available was completely different.
Before pensions freedom was introduced in April, you would normally have to buy an annuity and that was your only option. Apart from cashing in the pot completely in one go.
So many older private pensions set-up in the 1980’s or 1990’s through opting out. They would usually have special features attached to them.
i.e GAR (guaranteed annuity rate)
If you bought an annuity with your existing provider, they would normally uplift that amount in the form of enhanced or guaranteed annuity rate of income to stay with them.
It would be a higher amount, and if you moved elsewhere or shopped around. You would lose that guarantee and be given a lower amount.
Providers would include figures with the guarantee and without as some kind of comparison.
With profits:
With a with-profits policy, the pension provider would pay out an annual bonus each year to the policyholders and it would added into your pension plan. Then on maturity at selected retirement date, they would normally add a bigger sum as a final or terminal bonus.
Which could greatly enhance a pension pot value.
If you were t0 access a pot early or move elsewhere. They would normally charge a fee such as Market value reduction (MVR), so it wouldn’t affect other policyholders.
So be aware if you do move a with-profits elsewhere. What fees charges and future benefits are you giving up.
It may be an idea to wait until the policy has matured and become paid-up before moving elsewhere.
You may then decide to access in what format you want without being penalised.
Protected tax-free cash
Some older schemes, allowed a member to withdraw more than 25% as tax-free cash. Albeit in very limited examples. This is known as protected-tax free cash.
But be aware if you do take more than 25% as tax-free cash.
What effect will it have on your remaining pot as you are reducing its value significantly. Which will reduce the amount of income payable in later years.
Maybe you really need that additional income during your retirement.
Also, consider if a pension has special features and guarantees and you do move it.
If it is over £ 30,000 then the pension provider will usually insist that regulated financial advise is required. Would could become costly and time consuming.
If you need to use an IFA, check out the following link to find one near you. http://www.fca.org.uk
3. What fees and charges apply
Most modern schemes are now capped and have much lower and preferential rates.
If you work for a large employer, they would normally do a beauty parade across providers to get lower fees.
If you are in a simple workplace scheme such as Auto – enrolment the fees will normally be very low.
Suppose you are in a stakeholder pension plan the following fees apply:
For plans set up before 6th April 2005, fees are capped at 1.0%
For plans set up after 6th April 2005, fees are capped at 1.5% for the first 10 years. They are then reduced after that date.
If you are investing funds with an IFA (regulated financial adviser) the fees are normally much higher.
As you are paying the adviser commission, and possibly the network that he is affiliated to.
You should see a breakdown of annual fees and management charges in your annual benefits statement or latest valuation.
Or you could look at your paperwork when you joined that scheme. You can also find the details on your online account or portal.
It would be displayed as a monthly or annual amount of % figure.
So be aware of what fees you are paying and how does it affect the future performance of that specific pension.
If you are paying higher fees it could have a dramatic effect on the future illustrative value in later years. In that your pension pot may not grow as much.
Another consideration, if you have moved jobs and you have some small pots sitting there invested with an old provider.
Is that old pot being eaten away or eroded by ongoing fees and charges.
Most automatic enrolment fees, have a lower cost basis, normally capped at 0.75% on default funds.
My personal workplace pension has a charge of 0.34%.
4. Where are the funds invested
The vast majority of people have no idea where their monthly contributions are being invested on a regular basis.
Most people are automatically placed into a default fund, or target date fund when then join that scheme.
The funds are invested based upon your current age and the selected retirement date.
As you get nearer to retirement the funds are supposedly placed into lifestyle funds.
With the idea that the level of risk is being reduced as you get nearer to your retirement age.
You can actually pick your own funds if you wish. But most people have never been shown how to invest or pick their own funds and investments. The idea or notion appears complex and confusing so they don’t bother.
They just see a figure when they log into their account. Or looking at annual benefit statement.
So try and get involved within your pension plan.
Nobody should care more about it than you.
Ask some simple questions !
- Is a fund constantly making money or losing ?
- Does that fund beat it’s benchmarks ?
- Are you in the same funds when you joined that scheme ?
- have your attitude to risk changed as you get older !
- Will your projected illustrations, meet your needs in later years !
It should be a simple process online to amend or change your selected funds in a matter of minutes.
But believe me for most people its complete inertia.
Simple example:
When I worked for an old employer, they closed down its DB pension and replaced it with a new DC plan.
There were around 1500 employees enrolled into that new pension product. But only 3 people picked their own funds, (they were the trustees for the old DB pension). When speaking to work colleagues, most people didn’t know they could choose their own funds, and they were uncomfortable picking their own funds. They were never shown how to start investing, so they choose the simple option.
By getting actively involved in you pension. It could increase the value substantially if you are invested for many years in that scheme.
5. What contributions are being made
If you belong to a workplace pension, the contributions rules are normally set by your terms of employment.
For basic auto-enrolment plans, the minimum levels of contributions are 8%.
- you will contribute 4% of your salary,
- Your employer will contribute 3%
- HMRC will add 1% via tax-relief.
You can pay more into a pension plan each year, but most people are not aware of these rules.
Everybody has an annual allowance so £ 60,000 per annum (tax-year). Or a lower amount up to 100% of your income or salary. So if you earn £ 30K you can contribute you to 30K per tax-year.
You are allowed to make contributions up to age 75. Plus you get free money from your employer or HMRC via claiming tax relief, automatically done by your employer.
You can contribute even if you aren’t working, but you are limited to £ 2,880 (net) or £ 3,600 (gross) per tax year. Again up to age 75.
Again consider if you have the option to make additional contributions. Will you employer allow you through PAYE.
Can you afford to make additional contributions to increase your pot size in later years.
It may be done through salary sacrifice so you earn a lower salary thereby paying less tax and NI on your gross income.
Simple example:
If you earn £ 35,000 and you pay £ 5,000 into your workplace pension. You only pay tax and NI on the lower salary amount being £ 30,000.
If you are gong to make additional contributions, use the calculators and tools on your pension providers website. To see what effect it will have on your pot in future years.
Your online account, portal or benefits statement should provide you with illustrative figures at set dates in future. Based upon your future contributions levels and where that money is invested.
Be aware though, if you do add additional contributions, it may be tied-up in that pension for many decades.
As you cannot access until age 55 or 57 under new rules from April 2028.
6. Check your personal information
Make sure that you pension provider has the correct personal details for you. So they can find you in later years.
Such as name, date of birth, address, NI number, e-mail etc.
It’s amazing the number of people that have missing pensions pots. As they move house, remarry, divorce etc or they may lose relevant paperwork.
It is believed that £31.1 billion, is sitting in unclaimed or inactive pensions.
With the average lost pot being worth £ 9,740.
This has become more common in recent years through people being automatically enrolled into a workplace DC pension.
Along with the fact that people no longer have jobs for life, they could change emplpyers every few years.
Before they know it, they have acquired several small pots across lots of different pension providers.
Use the free pension tracings service to find any missing pensions being: http://www.gov.uk/find-pension-contact-details
Also provide details on the family members such as spouse or children a possible nominees.
You can pass on a DB or DC pension onto family members in the event of your death.
7. What about the death rules
You can pass on a personal or workplace pension onto family members, But it depends on what type of pension you have.
Defined Benefit:
The scheme member will normally be paid a guaranteed or defined benefit for life. Subject to annual increases set by the trustees running that scheme.
If the member dies the spouse will normally receive a spouse’s pension. Normally up to 50% of the members pension in payment.
When the spouse then dies the DB pension payments will cease.
It does pay a dependent pensions for children, but it is usually limited to age 21 or possibly age 23 if they are in employment or on benefits.
However though, this depends on each individual scheme rules. So check with that respective pension scheme.
Either way the risk is on the sponsoring employer, to honour their pension commitments,
Defined contribution:
With a DC pot you have accumulated a sum of money in value, which goes ups and down each day as it is invested.
If the member has yet to access the pension fund. Then the whole pot could be passed onto family members so spouse, children, grandchildren.
Or if there are no dependants it could be passed on brothers, sisters, nieces or nephews etc.
So the remaining funds in the pension pot should not disappear.
But what about the tax implications !
If someone dies under age 75, the beneficiary will receive the complete pot tax-free if they act within a 2-year timeframe. If they fail to act in that timeframe they will pay income tax at the marginal rate. It would be added to any other income they receive during that tax year.
It is somewhat different if the pension holder dies after age 75. The beneficiary will receive the funds in the pot, but they will have to pay income tax at their marginal rates. Again added to nay other they receive in that tax year.
Remember:
If you found this blog post useful and informative, please feel free to check out my other posts on pensions, investing savings, and investment books I recommend on https://moneyminted.co.uk
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