Pensions Awareness Day is approaching, and experts at Sanlam UK have come up with a handy guide for cutting through pension jargon and teach workers how to future-proof themselves. Given that working women are still found to be regularly retiring into poverty, the pension specialists are hoping they can enlighten the public in the specifics of pension preparation.
“One of the reasons for the lack of pensions awareness could be the system’s perceived complexity,” explained Elliott Silk, Head of Commercial at Sanlam UK, having heard too many people describe the process as ‘confusing’.
“This is perhaps unsurprising, especially when considering the amount of changes the system has undergone in recent years. Just getting to grips with the financial jargon associated with pensions can be a hurdle for many people looking to plan for their retirement,” continued Silk. “To help, we have put together a jargon-busting guide to some of the most frequently used terms.”
The annual allowance is the limit to how much an individual can contribute into a pension each year while still receiving tax relief. The annual allowance for most people is £40,000. However, for those with total income in excess of £150,000 p.a. the annual allowance can drop to as low as £10,000.
This is the maximum amount that you can hold across all of your pension pots without facing any tax implication. Although it is currently set at £1m, the level has been subject to change under different governments over the years. If you look like you’re are going to breach the £1m mark or have done so already, you should consider speaking to a financial adviser to seek advice on ways of protecting yourself and mitigating any tax charges.
“Defined contribution pension”
The most common type of pension used today and may also be known as a Personal Pension, Group Personal Pension, Master Trust or Money Purchase Scheme. It can be arranged by an individual or could be a workplace pension scheme from your employer and money can typically be accessed from the age of 55. The money you and your employer pay in is invested by your pension provider, and the pot you receive depends on how much you have put in and how well investments have performed over the lifetime of the pension.
A government initiative that encourages people to save for later life through a pension scheme at work. It is compulsory for employers to automatically enrol eligible employees into a qualifying workplace pension scheme. The employer must also make contributions (this is currently a minimum of 1.0% of your qualifying earnings until 6 April 2018, rising to 2.0% until 6 April 2019 then rising to 3.0%).
“Final salary (or defined benefit) pension”
No longer widely open to employees, the defined benefit pension was often referred to as ‘gold plated’ due to its apparent generosity. The amount you receive is based on how many years you have worked for an employer and your final salary as at the date you left employment or retired, paying out a secure income for life and increasing each year.
Under rules introduced in 2015, there are now more flexible options for withdrawing money from your pension plan after the age of 55. Before the so-called pension freedoms came into force, many people just took out an annuity; these days, it’s possible to withdraw the whole sum or small amounts in cash, while income drawdown means your provider will move your investment into funds designed to give the income you desire. Though be wary that taking too much too early could leave you without an income for later in life.
The world of work has changed considerably in recent years, and the idea that a person has just one or two jobs in their lifetime doesn’t really ring true for a lot of people. As a direct result of changing careers multiple times in their life, many people will have amassed a number of different pension pots through various employers along the way – consolidating these into one pot is therefore a useful way to keep an eye on your investments in one place. These are known as pension transfers.
The new-found freedoms have made annuities less attractive, but for many people they will still be central to planning for retirement. To put it simply, annuities offer you either a guaranteed income for life or for a fixed number of years. The income that you receive is dependent on how much you have saved and requires a detailed assessment of your life expectancy. Enhanced annuity rates are available to those in poor health or with a shortened life expectancy and you should always take advice when considering your retirement options as you are making a decision that will determine your income for on average the next twenty years or 240 pay packets.
“Self-Invested Personal Pension”
A self-invested personal pension (SIPP) is a defined contribution plan and it allows you to invest in a wider range of assets including purchasing commercial property. A SIPP allows people to take responsibility for choosing the investments or they can, of course, work with a financial adviser. As a result, this option is only wise for the investment-savvy or those who have access to independent financial advice.
“Tax-free lump sum”
From the age of 55, you can take 25 per cent of your pension pot as tax-free cash sum. You can take the tax-free cash sum in one go or spread it over a number of years. This can be a great option for people that want to pay off a mortgage, make a trip of a lifetime, reduce their working hours or maybe help their children with their first steps onto the property ladder. If you are taking a tax-free cash sum then you should note that this will reduce your income in later life.
In recognition of today’s mobile job market, you have the option upon leaving your employer to transfer your current pension pot. The pension administrator or provider will provide you with a transfer value that includes any benefits accrued. It’s important to consider any guaranteed benefits that you may be giving up prior to transferring any pensions.