At Wardour Partners we have an authorised pension specialist who solely provides advice for deferred members of occupational pension schemes
Even since A-Day when the rules regarding pension were ‘simplified,’ evaluating the best option is still complex, and the wrong decision will have a detrimental effect on your retirement income. The important factors to consider are:
We are able to:
Occupational pension schemes are employer-sponsored arrangements which provide income in retirement for employees.
The pension scheme is held under a trust for the benefit of the members and is run by a board of appointed trustees. The sponsoring employer is responsible for the funding of the scheme and does not own the assets of the scheme. The exception to this is public sector schemes, some of which are “unfunded,” i.e. they are sponsored indirectly by the UK taxpayer.
Final salary schemes are also known as defined benefit or salary related schemes. Whilst employed and a member of the scheme, the member accrues a level of benefit dependent on:
The accrual rate is the proportion of salary that is accumulated for each year of service. If the scheme has an accrual rate of 60, members will receive 1/60th of their final pensionable salary for each year of service completed.
Example: an employee retires after completing 30 years service with his employer on a salary of £40,000 per annum. Assuming an accrual of 1/60th, the member would be entitled to a pension of:
1/60th x 30 years x £40,000 = £20,000 per annum
For members who are still in service with the scheme’s Principal Employer, final salary pensions invariably offer generous benefits. Upon leaving pensionable service, the benefits will increase depending on the scheme rules for “deferred members,” and therefore each scheme will be potentially different. However, all schemes are governed by the minimum standards imposed by statute. Hence, the commonly used term of ‘frozen pension’ is misleading.
In addition to providing a pension at retirement, most schemes provide a spouse’s pension, both in deferment and in retirement. At retirement there is usually an option to convert (or “commute”) some of the pension to a tax-free lump sum (“pension commencement lump sum”). A few schemes provide a lump sum in addition to the pension, e.g. Local Government Schemes and Teachers’ Pensions.
Early retirement is permitted in most cases, however, the scheme may impose an early retirement factor as the scheme will be paying out the benefits for longer.
Money Purchase schemes are also known as defined contributions (DC) schemes. Whilst employed and a member of the scheme, the employer and usually the employee contribute either a fixed amount or percentage of earnings into the scheme. The income payable in retirement will depend on a number of factors: the level of contributions, the underlying growth of the fund, the annuity rates available at retirement, the charges / administrator costs and your personal tax status (and the tax legislation at the time.)
These types of schemes are generally preferred by employers because there is no real ongoing liability other than the employer’s contributions to the scheme.
Prior to 2012, some Money Purchase Schemes were contracted-out of the State Earnings Related Pension Scheme (SERPS) and State Second Pension (S2P). For Pre 97 benefits this can either be on a Guaranteed Minimum Pension (GMP) or Protected Rights basis. At retirement a member would not be entitled to a SERPS or S2P pension for the years they were a member, as this must be provided by the scheme (although the State does potentially provide a proportion of the GMP escalation in payment). A new single-tier universal state pension has been introduced from 6th April 2016 and replaces the previous 2-tier system, heralding the end of contracting out. Those employees who were previously contracted out of the State Second Pension will see a corresponding increase in their National Insurance contributions from the tax year 2016/17 onwards.
Buy-out plans (formerly known as Section 32 buy-out bonds) or money purchase occupational schemes which have been ‘Personally Assigned’ to the members are pensions which retain the ‘occupational pension rules’. A buy-out plan is a single premium investment from a former occupational scheme. Both these schemes may hold GMPs. These schemes are not automatically placed under a discretionary trust, as personal pensions are. Therefore if the policyholder were to die before taking benefits, the proceeds may be subject to Inheritance Tax. A policyholder should consider whether to place these benefits under trust.
A Personal Pension Plan is an investment policy for retirement, designed to offer a lump sum and income in retirement. It is available to any United Kingdom resident who is under 75 years of age and is available from insurance companies, high street banks, investment organisations and some retailers (i.e. supermarkets and high street shops).
The amount of pension payable when you decide to retire is dependent upon:
Crystallisation age can be at any time from the age of 55 and there is no longer a requirement to take benefits by age 75. When you draw benefits, you can normally take up to 25% of the value of your fund as a tax-free lump sum. The remainder of the fund can be used to buy an annuity or 'secured pension' with an insurance company. (See section on Annuity Rates). Alternatively you can draw a flexible or capped income. (See sections on Post and Phased Retirement).
New legislation introduced in April 2015 enables personal pension members to access their entire pension fund after age 55. Whilst the first 25% of their fund would normally be free of tax, the remaining amount would be subject to an individual’s marginal income tax rate.
A Self Invested Personal Pension (SIPP) offers you the widest range of investments to choose from and the opportunity to get the best value for your money. A SIPP also gives you even more flexibility and choice than a traditional personal pension.
For example, a summary of the current permissible investments is shown below:
You may incur costs should you decide to buy a particular product and these will be fully explained to you by the advisor before you finally decided to proceed.
Since 6th April 2011, 'Unsecured Pension' is defined as a form of either Capped or Flexible Drawdown.
In the meantime, you can withdraw, or ‘draw down’, a (taxable) income from the remainder of your pension fund, which remains invested within a tax-advantageous environment.
As a lifetime annuity has not initially been purchased, this potentially allows you greater flexibility and control in the following areas:
As you must firstly transfer your accrued pension fund(s) into an income drawdown plan, it is very important that you initially discuss the feasibility of the transfer(s) with us.
It is also important that the transfer(s) occur before you take any benefits from the transferring scheme(s). However, you are able to transfer pension funds held within an existing income withdrawal arrangement to an alternative income withdrawal provider.
Income drawdown will not be suitable for all investors. It is essential you fully understand and accept the potential disadvantages and inherent risks involved.
However, income drawdown can still constitute an efficient tax-planning tool, a means of accessing the available Pension Commencement Lump Sum without having to extract any taxable income and as a way of providing an individual (and in particular, their surviving dependants) with a greater range of death benefit options than compared with, for example, conventional annuities purchase.
We understand the changing lifestyles of people approaching retirement. Many people no longer make a ‘once and for all’ decision to retire.
Capped Drawdown can help, by allowing you to defer the purchase of a lifetime annuity, whilst drawing an income from your fund, if required. However, if your entire pension fund is applied to capped drawdown, you must take your ‘Pension Commencement Lump Sum’ (PCLS) at the outset, if you require it; otherwise, you will lose your entitlement to it.
It is for this purpose that many Phased Retirement and Capped Drawdown contracts are sub-divided into several hundred segments. This means that you can choose to take benefits from a certain number of segments and leave the remainder uncrystallised in a “Phased Retirement Plan”. Part of each segment ‘crystallised’ to provide pension benefits can then be paid as a (potentially tax-free) PCLS, with the remainder being used to provide a (taxable) income. This may be provided either by capped drawdown, or by the purchase of an annuity.
Here, a specified number of segments could be used to purchase a lifetime annuity, with the remaining segments staying fully invested in the Plan.
In summary, by following a ‘phased’ approach, you maintain full control over the income amount you receive, which is met by a combination of (potentially) tax-free PCLS payments and either annuity and/or income withdrawal payments.
What is an annuity?
An annuity is a regular taxable income paid for life in exchange for a lump sum, usually the result of years of investing in an registered pension scheme. There are different types. The vast majority of annuities chosen are conventional and pay a risk-free income which is guaranteed for life. The amount you receive will depend on your age, the size of your pension fund and, in some circumstances, the state of your health or even your postcode.
Are they good value?
Falling interest rates, poor stock market investment returns and greater life expectancy have seriously devalued annuities over the past decade.
However, supporters of annuities point out that they offer absolute security for as long as you live. Level annuities will pay an unchanging income from the outset. An alternative is to buy an annuity that offers payments that rise in line with inflation, thus maintaining the spending power of your income.
Are they flexible?
No. Conventional annuities cannot be changed, transferred or surrendered for cash. This makes it essential to choose the best possible deal when the time comes.
Do I have to buy one?
Since 6th April 2011 the requirement to buy an annuity by age 75 has been removed.
Do I have to accept my pension company's annuity offer?
No. Your pension company will want you to choose its annuity offering, but the law says you don't have to. Everyone has the right to use the 'open market option' – shop around and choose the annuity that best suits their needs. A starting point could be to consult your Wardour Partners adviser.
How will health affect annuity income?
If your health is such that you will not be expected to live as long as most other people of your age, you may qualify for enhanced payments. This type of annuity is sometimes known as 'impaired life'. You will need to speak to your Wardour Partners Adviser for an individual assessment.
What else do I need to know?
Some older pension policies have special guarantees that mean they will pay a much higher rate than is usual. Guaranteed annuity rates (GARs) could result in an income twice or even three times as high as policies without a GAR.