Pre-Retirement Planning | LR

A personal pension plan is a tax efficient savings vehicle designed to encourage people to save for their retirement.

Since October 2012 all employers, subject to certain Terms and Conditions, with at least 1 employee, must provide a pension plan, automatically enrol those qualifying employees, deduct contributions from their salary and pay them into the pension plan and make employer contributions in to the employee’s pension.

It is important to understand why people contribute to a pension:

  1. Because they do not have sufficient income in retirement;
  2. Because they do have sufficient income, but want the tax benefits received by contributing to a pension; or
  3. To boost the savings of others (please see our section on Inheritance Tax planning).

The tax benefits of contributing to a pension scheme include:

  1. Tax relief on contributions at your highest marginal rate;
  2. Tax efficient growth on your pension fund, whilst invested.

A deeper look at how Pre- Retirement planning works

Personal contributions in to a personal pension plan are usually paid net of basic rate tax, this is because the contributions are made out of income, which has been taxed. The pension plan provider will reclaim the basic rate of tax paid on the contribution from Her Majesty’s Revenue and Customs (HMRC); this is commonly known as tax relief, and add the reclaimed tax to the net contribution to make a gross contribution. The gross contribution is the total amount invested.

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Why use a pension plan?

A personal pension plan allows you to build up money tax-efficiently for your retirement to provide you with an income for life, cash lump sum(s) and/or tax-free cash.

Why is it so tax efficient?

You choose the level of Contribution you wish to make (the net contribution). Your pension provider will add tax relief at the basic rate and invest it in your plan (this is known as the gross contribution). They then reclaim the basic rate tax relief from Her Majesty’s Revenue and Customs (HMRC). You’ll receive tax relief on all regular and single contributions you make to your plan up to a maximum of £3,600 gross per year or 100% of your gross earnings, whichever is greater. (Regular contributions are usually made by direct debit and single contributions by cheque).

Please note: Tax rules depend on individual circumstances and may change.

Can I change my contribution levels when my circumstances change?

Pension plans are very flexible, you can ask to stop your contributions at any time and restart them at any time. You can reduce or increase your contributions to your plan. However, by stopping or reducing contributions may reduce the amount you get back from your plan. You can ask for more information about the effect of stopping or reducing your contributions.

How are my contributions invested?

You can choose to have your contributions – and any made on your behalf – invested in unit-linked funds, these contributions are pooled with those made by other investors and are invested in a range of different types of funds, including company shares, property, bonds and cash. The unit-linked funds are made up of units, which you buy with your contributions. The price of these units depends directly on the value of the investments in the fund. Your pension fund value is based on the total number of units you have in the fund and the unit price (the price at which the fund manager buys and sells units). If the unit price rises or falls so will the value of your investment in the unit-linked fund.

Can I change the funds in to which I invest?

You can change your holdings in an existing unit-linked fund to any of the other available unit-linked funds (this is known as switching) and leave your contributions invested in the original unit-linked fund(s). You can change where your future contributions are invested from the original unit-linked fund(s) to any of the other available unit-linked funds (this is known as a redirection). Finally, you can switch funds and redirect your contributions.

If I have an old pension can I move it into my new pension?

It may be possible to move (transfer) your old pension plan to your new pension, but you will need independent financial advice to see if your old plan has any special benefits attached to it, before you go ahead and transfer.

When can I take money out of my personal pension?

Under current legislation, the earliest age benefits can be taken from a personal pension fund is age 55 (the minimum pension age). However, the government has proposed to increase the minimum pension age to 57 after which it will always remain 10 years below the state pension age.

How will I know when I have enough to retire?

You should receive an annual statement from your provider which will tell you how much you have in your fund and a projection of how much you may get at your chosen retirement age. However, your provider will not advise you if this is sufficient for your needs. It is therefore, recommended that you have regular reviews with an independent financial adviser who will be able to inform you if you are on track to retire on the income you will require in retirement.

Do I have to take the benefits from my pension when I originally said I would?

Pension Plans are very flexible now – even if you stated that you wanted to retire at a certain age, you can take your benefits from age 55, In fact, now you don’t have to take the benefits at all and instead you can leave your fund to your chosen beneficiaries when you pass away. However, if you do this, there could be tax implications for your chosen beneficiaries, this, so please speak to your adviser.

Can I transfer my plan to another pension provider?

Yes, you can transfer your pension plan to another pension plan provider at any time. Should you decide to do so you can ask for and illustration, which normally show your fund value and the fund’s transfer value. You can then see if there is any penalty to move your pension fund or if there is an enhancement given by the provider (this could be a loyalty bonus) when you transfer.

Can I change my mind after I have started my pension plan?

If you have started a new pension plan, depending on the provider you can normally change your mind within 14 – 30 days of receiving your pension plan documents (this is known as the “cancellation period”). If you decide you don’t want the plan, you must write and tell the provider. They will then give you your contributions back. If the provider does not hear from you within the cancellation period, your plan will continue.

If I pay in a single contribution and change my mind, will I get my money back?

If you have an existing pension plan and make a single contribution, there is no cancellation period and therefore have no legal right to cancel. When you make a single contribution to a new pension plan, you are buying units in your fund(s) and as these units fluctuate in value on a daily basis, should you then change your mind, you must write to your provider within the cancellation period to cancel. On receipt the provider will then sell the units purchased (at the next trading date) and if the unit value has fallen the amount returned will be less than the contribution made. Also, if you engaged a financial adviser and agreed the fee to be paid via the provider, then the amount returned will be less their fee. If, however, the unit value has increased, then the amount returned will be the value of the contribution, less any agreed adviser charge payment from the plan for the services they provide. This will be less than you paid in. Please Note: Once the cancellation period has expired, you have no legal right to cancel.  If you made a transfer payment to the plan, then the provider will pay the money back to the other pension provider it came from. If the transfer came from an occupational pension scheme, the trustees of the transferring scheme may not accept the transfer payment back if you decide to cancel the plan.

What happens to my money if I die?

If you pass away under the age of 75, the value of your plan can be paid to your beneficiaries as a lump sum, the lump sum will be paid free of income and capital gains tax so long as the value is less than your available Lifetime Allowance when you die. Alternatively, it may be possible for your fund to be paid as an income to your spouse, civil partner or other beneficiary as a drawdown pension, or by purchasing an annuity. Both the lump sum or income would be paid income tax free, as long as it is paid within two years of the Scheme Administrator has been made aware of the date of death.

If you are age 75 or over, your fund can be paid out as a lump sum at the beneficiary’s marginal rate of income tax. Alternatively, the fund could be used to provide your beneficiary with continuing drawdown pension, or an annuity. This income would be taxable at your beneficiary’s marginal rate of income tax. 

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