Everyone is familiar with the concept of a pension - it's your retirement fund. Whether you think about your retirement or not, you've likely been contributing to some form of pension since you started working.
In more recent years, with the introduction of ‘auto-enrolment’, your employer now has the responsibility of enrolling you into their workplace pension scheme, conveniently taking any necessary consideration out of your hands. This type of automatic pension scheme is fantastic in helping to build savings to take you into old age, but there are also other pension options available, and understanding these will give you more control and freedom to decide what you want your pension pot to look like.
But first, let's take a look at the benefits of investing in a pension:
- Tax relief: Unlike with most savings vehicles, pension contributions qualify for tax relief. Typically, there is an annual contribution allowance of £40,000 per tax year per person. This may vary depending on how much you earn, the way you contribute and the type of pension scheme you have.
- Tax-exempt: Currently in the UK, income and capital gains made within a pension are not subject to tax and do not need to be declared on your tax return. In most cases, pensions are also exempt from UK inheritance tax.
- Inheritable: If you pass away and there is money still in your pension, it may be possible to pass the value onto your spouse, family or future generations.
As briefly touched upon above, a workplace pension is a way of saving for your retirement through contributions deducted directly from your salary. Workplace pensions help to ensure that everyone is investing in their future.
The pension is arranged for you by your employer, and if you are eligible for automatic enrolment*, your employer has to make contributions into your workplace pension alongside your own. From 6 April 2019 the minimum contribution is a total of 8% of earnings, of which a minimum of 3% must be contributed by the employer. You will also receive a bonus from the government in the form of tax relief on your own contributions.
If your workplace pension is invested in the default fund, the ongoing charges are capped at a maximum of 0.75% per year. Default funds are designed to offer an appropriate investment strategy for people who can’t or don’t want to make their own pension investment decisions. The maximum charges cap doesn’t apply if you make an active choice to select a different fund within your workplace pension. The charges in this case will vary, depending on the fund or funds you choose to invest in.
If you are a member of a workplace pension, you have the make the minimum monthly contributions set out by the scheme and there is limited flexibility to stop and restart your contributions.
*Auto-enrolment was introduced in 2012 and differs from how workplace pensions traditionally worked. Previously, the onus was on you to join your employer's pension scheme if you wanted to. Under auto-enrolment, you are automatically put into your employer’s workplace pension scheme – though you can still choose to opt out if you wish.
The Stakeholder pension was introduced in the early 2000s to encourage those with low to moderate earnings to invest in their long-term retirement savings. Unlike an auto-enrolment workplace pension, Stakeholder pensions offer lower minimum contributions and more flexibility to stop and start payments. You can also make one-off lump contributions to a Stakeholder pension more easily.
Ongoing charges for a Stakeholder pension are capped. They can't exceed 1.5% per year for the first ten years and 1.0% after that. Tax relief is also offered on your contributions, helping to boost the amount invested.
As a starting point, the Stakeholder pension is a great low-cost solution. However, as with all things cheap, there are some limits to the investment and retirement options, making it a great starting point but perhaps not the best solution once your pension starts to grow in value or you near retirement.
Please also note that since auto enrolment was introduced in 2012, employers with five or more staff no longer have to offer a Stakeholder pension to new employees as they have an obligation to offer an automatic enrolment scheme but they do retain an obligation to any staff who are already members of a Stakeholder scheme. Stakeholder schemes may also be eligible for auto enrolment – speak to your employer for details.
Similar to the Stakeholder pension, the personal pension gives the same flexibility to stop and start contributions and allows you to make lump-sum payments. Where they differ is that they tend to offer a better range of investment and retirement benefit options, and there are slightly higher monthly contribution limits - typically in the range of £30 - £50 per month.
As with all previously mentioned pensions, tax relief is offered on your personal contributions. One point to watch on personal pensions is that there is no cap on charges so the ongoing cost of a personal pension could end up being higher.
Self-Invested Personal Pension (SIPP)
Offering a far broader range of investment options than other types of pension, SIPPs give you the ability to invest in direct equities, commercial property and fixed-rate deposit accounts. Those extra abilities beyond the other pension schemes make SIPPs a helpful tool to help mitigate capital value erosion. SIPPs also offer some of the most flexible options for withdrawing your money in retirement.
A SIPP comes with similar rules to the Personal pension when it comes to contributions and benefit withdrawals. SIPPs often have set up fees and various charges for additional administration at retirement and higher ongoing costs but these can be offset by the potential for the SIPP to grow at a greater rate thanks to the broader investment options available.
Small Self-Administered Scheme (SSAS)
A type of trust-based occupational pension, a SSAS is typically set up by Limited company directors for specific employees in that company. It's designed to give complete control over the pension fund for groups of individuals who run a common business. The trustees (usually the company directors) can then invest funds as they feel appropriate to the needs of the SSAS.
Investment options for SSASs are similar to those within a SIPP, and depending on the number of members, the cost per member can be lower than individual SIPPs. SSAS’s enjoy all the same benefits as other pensions, including income, capital and inheritance tax exemption and tax relief on contributions.
In conclusion, there are various types of pension scheme available, and an awareness of these will help you plan for your retirement. Of course, which type is suitable for you will depend on your circumstances so to help demystify pensions even further, we can work with you to understand your specific circumstances & retirement objectives, and this will help us to determine which type of pension will best help you to reach your retirement goals.
Please contact us for a free consultation and review meeting to discuss your retirement planning. Centred on your goals, we can tell you with absolute transparency whether we can help you and what it will cost to do so.
The above information is for educational purposes and is not a personal recommendation or investment advice. Content is accurate at time of writing and tax limits may change. If you are unsure about the suitability of a particular investment you should speak to an authorised financial adviser. The value of investments can go down as well as up. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553).
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