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Pensions

How Flexible is Your Pension?

By | Pensions

Prior to 2015 you had far fewer choices when it came to your retirement. For most people, their only option was to buy an “annuity” (fixed retirement income product) when they eventually retired. Today in 2019, however, there is much more flexibility.

If you want to, it is possible to continue working whilst receiving your pension benefits provided you meet certain conditions (e.g. you move from full-time to part-time work, or lower your grade). There is also the option to either buy an annuity to supply a retirement income or generate an income using a “drawdown” approach. You could even combine the two together!

This increased flexibility is great on the one hand, as it has opened up more opportunities in retirement for many people which better fit their goals and lifestyles. However, on the negative side, this new set of pension laws has made it far more complicated for people to effectively plan for their retirement.

At WMM, as financial planners, we regularly help clients in Oxford and further afield to navigate this complex landscape towards their retirement goals. In this article, we’ll be sharing a short guide on “flexible retirement” – how it works, as well as some of the opportunities and pitfalls to be aware of.

Please note that this content is for information purposes only, and should not be taken as financial advice. To receive tailored, regulated advice into your own situation and goals, please consult with an independent financial adviser.

Retire while you work

Depending on the precise rules of your pension scheme, it might be possible for you to wind down your hours in employment and start receiving your pension benefits after the age of 55.

This is known as “flexi-access drawdown”, and it allows you to take as much or as little as you want from your pension pot even as you continue to draw a salary from your employment.

However, the fact that you have this freedom does not automatically mean that you should use it. Depending on your particular financial situation and goals, it might be appropriate to access your pension benefits whilst employed – or keep it invested until you fully retire.

There are various advantages and disadvantages to both options. The arguments in favour of flexi-access drawdown include:

  • Reducing your hours in the office whilst maintaining a steady income stream from your salary and pension benefits, allowing you to focus on things you enjoy.
  • Irregularities and drops in your salary earnings can be “topped up” by your pension benefits, allowing you a sense of financial security and peace of mind.

On the other hand, you should also consider the following:

  • Most individuals are unlikely to have enough money in their pension pot to make flexi-access drawdown a sustainable option over the long term. Remember, you need your pension to help sustain you potentially into your 80s or 90s. Flexi-access drawdown could result in you needing to work for more years, compared to if you had started taking your pension benefits later.
  • Drawing upon your pension benefits early can affect your tax allowances negatively. For instance, it tends to trigger the MPAA (Money Purchase Annual Allowance) which reduces the amount you can contribute to your pension savings each year.

Retirement income options

In light of the above, you should consider talking through your options with a qualified financial adviser regarding when, exactly, you should start taking your pension benefits. However, even once you have an idea of your timescales, you need to consider how your retirement income will be sustained in the longer term.

As mentioned above, prior to 2015 most people needed to buy an annuity in order to fund their retirement lifestyle. This is no longer the only option since it is now possible for people to keep their pension pot invested during retirement whilst also drawing an income from it (i.e. officially known as “income drawdown”).

Arguably, this latter option carries much more flexibility for your retirement but also carries the risk of your income fluctuating, even going down, over time depending on the performance of your investment portfolio.

An annuity, on the other hand, allows you to “buy” a “fixed income” for the rest of your life. This tends to provide a greater degree of financial stability and certainty, yet it also restricts your options. Once you have bought an annuity, you cannot usually go back.

Everyone is different, so which route you take will completely depend on your personal goals and situation, and you should discuss these with a financial adviser to help determine the best course of action to take in your particular case. It is worth noting, however, that:

  • It is sometimes possible and appropriate to combine the two approaches. For instance, you could potentially buy an annuity with a portion of your pension pot whilst keeping the rest of it invested – whilst also drawing an income from it.
  • Whilst some people might benefit from buying an annuity once they fully retire, in some cases, it might be best to rely on income drawdown in the short term and potentially buy an annuity later on in retirement. One argument in favour of this approach says that you can always change your mind and buy an annuity later, but you cannot “un-buy” an annuity and go back to income drawdown later. On the other hand, you should be aware that the cost of an annuity might go up as you get older.

Pension essentials: What you need to know

By | Pensions

The UK pension system can seem very confusing. All you want is to know what you need to do to one day retire comfortably. Why does it have to be so complicated?

There are many reasons why it isn’t straightforward. However, the good news is that you do not need to feel trapped and overwhelmed by all the jargon surrounding pensions.

In this short guide, our Oxford-based financial planners here at Weston Murray & Moore will be offering you a short explanation about how pensions work. We’ll then present some ideas about how you can start planning for the retirement you eventually want.

What is a pension?

Simply put, it’s a type of income you get once you finish working. You build up this income throughout your working life, for instance, by putting money each month into a pension pot.

The confusion tends to come in when looking at the different types of pension available.

The State Pension

British citizens should all get a state pension when they retire. This is money which you get from the government, and the amount is determined by how the amount of National Insurance contributions you made during your lifetime.

Other types of pension

One common type of pension occurs in your workplace and is called a “defined contribution” pension. Most people are now put onto one through a process called “auto enrolment”.

Here, both you and your employer put money into your pension pot each month in order to save towards your retirement. In 2018-19 you must put in at last 3% of your salary, and your employer must put in at least 2%.

Another important type of pension is the “final salary” pension (sometimes called a “defined contribution” pension). Here, neither you nor your employer put money into a pension pot each month. Rather, your employer pays you an income when you retire. The amount usually depends on factors such as your salary when you retired, and your total years of service.

One other common pension type is the “personal” pension (sometimes called a “private” pension). In this situation, you set up a pension scheme yourself with the help of a pension provider – rather than through your employer.

Can I just rely on the State Pension?

For most people, the short answer is no. In 2018-19, the new full State Pension will give you a maximum of £164.35 per week. That’s around £657 a month – or £8,554 per year.

Even assuming you have fully paid off your mortgage by the time you retire, the children have left come and you no longer face costly expenses like work commuting costs, this is unlikely to cover most people’s expenditure in retirement.

For instance, Which? estimates that you might need between £26,000 – £39,000 per year in order to live comfortably in retirement. That’s a lot more than the £8,554 offered by the State Pension! To achieve this, most people are going to need to make extra retirement plans.

Can’t I just rely on my workplace pension?

You might be able to, but you need to check the benefits your workplace pension gives you.

Remember, in 2018-19 your employer is only legally-required to contribute 2% of your salary towards your pension pot (assuming you are on a defined contribution scheme).

You will have to put in a minimum of 3% – which makes a total of 5%. You then need to look at what this amounts to, in light of your annual salary.

For instance, for a salary of £25,000 this 5% amounts to £1,250. Imagine for the sake of example that this person stays on this salary and contribution level for the next 30 years, to the point where they are thinking about retirement.

At this point, the total contributions would be £37,000 (i.e. £1,250 x 30). The total amount in the pot might be more, however, if this money has been invested sensibly and produced a healthy level of interest growth.

So again, for the sake of argument let’s assume that the money grows 5% each year over the course of 30 years. In this case, the total in the pot could be closer to £85,000.

That sounds like a lot, right? However, you need to consider how this £85,000 might stretch across your retirement – which could last as long as 10, 20 or even 30+ years.
For many people, simply relying on their State Pension and default workplace pension arrangements might not be enough to cover your lifestyle and expenses in retirement. It is therefore usually a good idea to talk things through with a financial planner.

Where a financial planner can help

Part of the trouble of knowing how much you need in retirement is that you do not know exactly what your costs are going to be.

The other challenge is trying to figure out exactly how to plan your finances over the next 20-30 years, in order to save up enough to cover those costs.

A financial planner can offer lots of help in these areas. First of all, they can help you realistically assess how much you are likely to need in retirement, in light of your desired lifestyle and financial goals.

Secondly, they will be able to show you how to realistically achieve those goals through a tax-efficient financial plan. For instance, it might be that your financial planner recommends that you continue building up your National Insurance contributions to get the full State Pension.

In addition, they might advise that you also increase how much you are contributing to your workplace pension, and help you set up an additional personal pension.

Or, perhaps your financial plan will look completely different from this. It depends entirely on your unique financial situations and goals.

Get in touch today if you are interested in arranging a free, no-commitment pension consultation with one of our Oxford-based financial planners here at WMM.

Jargon Busting: A Simple Guide to Pension Terms

By | Pensions

The thought of sorting out your finances can be intimidating – even more so when faced with some of the pension jargon you need to wrap your head around. Pension transfers, defined contribution and defined benefit… it’s enough to intimidate anyone.

In light of this, our financial planners at Weston Murray & Moore thought it would be helpful to collect a list of simple definitions surrounding pensions. Hopefully, this will help you as you approach your retirement planning.

Please do get in touch if you need more information and advice.

Pension

Think of this as your income or savings after you retire from work. There are different types of pension, which we will cover below. In simple terms, you can either draw a monthly income from your pension, or you can take out one or more lump sums.

 

Defined contribution pension

This is a type of pension which involves building up a pot of retirement money throughout the course of your career.

Your workplace pension is quite likely to be a defined contribution pension, where both you and your employer put in a set amount of money into your retirement pot each month.

 

Defined benefit pension

Sometimes this is called a “final salary pension”, and it is a different type of workplace pension (now less common). Here, instead of building up a pot of money over time with your employer, the latter pays you an income after you retire.

The amount you get will depend on a few factors, for instance, how many years you worked at the company, what your salary was and your “accrual rate”.

 

Private pension

A private pension is sometimes also referred to as a “personal pension”, and is usually a type of defined contribution pension (see above). However, in this case, you usually set up the pension yourself rather than through your employer.

 

State pension

Your state pension is the money that the UK government gives you as an income after you retire. The amount you get each week depends on how many years’ National Insurance you have paid into the system. If you have 35 full qualifying years, you should get the full amount.

 

State pension age

This is the minimum age you have to reach in order to start receiving your state pension (assuming you qualify to receive it). The age you must attain will depend on your date of birth. At the moment, it is 65 for men and women. However, this will go up to 67 between 2026 and 2028.

 

Auto enrolment

Under UK law, your employer is required to put you onto a pension scheme. This is known as auto enrolment. Under this scheme, both you and your employer must contribute into your pension pot.

In 2018-19 you must contribute at least 3% of your salary, and your employer a minimum of 2%. Please note that these are set to rise in the next tax year to 5% and 3% respectively.

 

Annuity

When you approach retirement, you have a number of options when it comes to deciding what to do with your pension money. One option might be to buy a financial product called an “annuity”, which basically gives you a guaranteed lifetime income during retirement.

 

Income drawdown

Another option for deciding what to do with your retirement money is income drawdown. This is where you take bits of money out of your pension pot gradually, over time, as and when you need it. The rest of the pot stays invested, which means it can continue to grow over time.

 

Annual allowance

This refers to the maximum amount you can put into your pension each year, without attracting a tax charge. In 2018-19 this is currently £40,000, and it applies across all of your pensions.

 

Lifetime allowance

This is the maximum total amount you can have saved into your pension(s) without incurring taxes when you start drawing from it/them. For 2018-19 the lifetime allowance is £1,030,000, but it will go up to £1,055,000 in 2019-20 in line with the Consumer Prices Index.

 

Inflation

Prices of goods and services across the UK market do not remain static. They tend to go up each year, which is known as inflation.

To help ensure that people’s retirement money retains the same spending power over time, the government uses policies like the “triple lock”. This ensures that the basic state pension rises by either 2.5%, the rate of inflation or average earnings growth (whichever is highest).

 

Lump sum / tax-free lump sum

After you reach age 55, UK law currently says that you can take up to 25% out of your pension pot without attracting tax. This is your “tax-free lump sum”.

 

Investment

You can do many things with your money intended for retirement. You could put it into a simple savings account, for instance, which might earn you a little bit of extra money through interest.

Or, you could use it to buy “investment products” which usually have a better chance of getting you higher interest rate over time. Examples of these products include “bonds”, “stocks and shares” or “commercial property.”

A financial adviser will be able to help you sift through the different types of investment products available, and discern the best set of investments to put your money into.

 

Investment / risk profile

As mentioned immediately above, there are lots of different types of investment product you can buy. Some (e.g. “stocks and shares”) have the potential to bring you are higher return but tend to carry a higher risk of going down in value. Others (e.g. “government bonds”) have a lower chance of going down in value, but correspondingly carry less potential for a high return.

Your investment profile refers to your investment “style”, and it plays an important role in determining which mixture of investment products you should buy. Please note that there is no “right” or “wrong” investment profile – there are just different types of people.

For instance, if you have a more “conservative” profile then this usually means you do not want to expose yourself to too much investment risk. As a result, you might buy a higher number of bonds compared to someone with a “growth” investment profile, who might buy more stocks and shares due to their willingness to take on more investment risk.

Can I cut inheritance tax with a pension?

By | Pensions

Most people recognise that we have a responsibility to pay our fair share towards society. With that being said, most of us instinctively want to look after our family, first and foremost.

Sadly, many people are overpaying the taxman when they could legitimately pass on more to their loved ones. One powerful, but little-known way to do this is through a pension.

In a moment, we will show you how this is possible. First, however, let’s recap some essentials.

How inheritance tax works

Inheritance tax (IHT) is levied at 40% on the value of your estate over £325,000 (2018-19).

If you are married or in a civil partnership, then you can combine your IHT thresholds to allow to pass on £650,000 tax-free to your beneficiaries.

Unmarried couples do not get this benefit, unfortunately.

From April 2017, moreover, a further tax-break was introduced for the family home. In 2018-19, this allows each of you to pass on an extra £125,000 to your direct descendants in the form of the value of your residential property. In 2019-20, this will go up to £150,000 each.

This means that, theoretically, a married couple could pass on up to £900,000 of their “estate” to their children without attracting IHT.

The types of assets which comprise your estate include:

  • Cars and other vehicles
  • Property
  • Investments
  • Insurance policy payouts
  • Jewellery and other personal items
  • Business assets which you own

Notice, however, that one important item is missing from the list: your pension.

That is entirely deliberate. Under UK tax rules, pensions are awarded special status which means they are not considered as part of your estate for inheritance tax purposes.

What this means is, with some forward planning, you could potentially pass more money on to your children and grandchildren one day via your pension.

An outline of the opportunity

If you have a final salary pension (or a “defined benefit pension”), then, unfortunately, this route will not be open to you unless you transfer it to a defined contribution pension.

Doing this, however, is a huge decision and not one to be taken lightly. You should consult with an independent financial adviser who specialises in pension transfer before doing so.

If, however, you a have a defined contribution pension and you are concerned that a good portion of your estate might end up facing IHT, then this could be an option open to you.

In 2015, the “death tax” was abolished – which used to levy a tax of up to 55% on unspent pensions. In 2018-19, however, your pension will pass on to your beneficiaries completely free of tax if you die before the age of 75.

If you die after the age of 75, your pension is still passed on to your family members. However, the amount each person receives is added to their income for the tax year. This means that it will be taxed at the relevant rate of income tax.

The recipient of your pension might want to take all of the money at once, as a lump sum. In which case, the amount will likely be taxed. With careful planning, however, using gradual withdrawal of the pension it might be possible for it to avoid income tax completely.

Implications

Assuming you are keen to pass on more wealth to your loved ones instead of the taxman, it often makes sense to first spend from your other assets which might be liable to IHT (e.g. ISAs, savings accounts etc.) ahead of your pension(s).

You do need to be careful, however, when thinking about passing on your defined contribution pension to children and grandchildren. Since it will effectively be added to their income for the tax year, the amount they receive could end up pushing them into the higher tax brackets.

For instance, if your son is currently earning just below the higher rate of tax (just shy of £46,350 in 2018-19), then most if not all of the amount of your pension he receives as an inheritance would be taxed at 40%.

If he earns near the additional rate (£150,000) then the amount could take him into this tax bracket, which would mean your pension would be taxed at 45%. That’s more than the IHT tax of 40%! Remember as well that for every £2 he earns over £100,000, he loses £1 from his tax-free personal allowance. So the pension would effectively end up being taxed even more.

Usually, the best thing to do is to plan your estate with an experienced financial adviser who is familiar with the legislation, as well as the common pitfalls people fall into. That way, you ensure you leave no stone unturned and set yourself up to make the best decisions available to you.

This will also help you avoid running to trouble with HMRC. For instance, if you have been putting £2,000 a year into your pension for years, but suddenly put £50,000 into a pension after being diagnosed with a terminal illness, then you could be setting yourself up for trouble.

Consult with a specialist for peace of mind, and to make sure you are keeping everything above board as you plan your legacy. If using a pension to minimise your IHT exposure is not really a viable option for you, then there are plenty of other avenues you can explore in order to leave more of your wealth to your loved ones.

Get in touch today for a free consultation to explore your options for your family’s future.