Have you had questions about your finances that you’ve been too embarrassed to ask a professional? In this four-part series I’m taking a look at 50 of the most popular questions that people may be too scared or embarrassed to ask. Here we go with the first ten questions.
A pension is essentially a vehicle for you to invest into for you to use later in life. You get tax relief on any contributions you make depending on how much you earn and the tax rate. This money can’t be accessed until you are older. Currently, the number is 55 but for people under the age of 45 this will change to 58. The money can grow tax-free whilst in the pension and can be invested in different assets.
There’s no easy to answer to this. It all depends on the circumstances and there are two main elements to this. You can put in as much as your ‘relevant’ earnings are which is basically how much income you earn. There is an annual allowance of £40,000 meaning that you can get tac relief on pension contributions up to this amount. However, if you haven’t made use of your annual allowances over the last three years you may be able to put more in and get tax relief too. For high earners of £210,000 plus, the annual allowance may reduce under tapering to as low as £10,000. For people over 55 who have accessed their pension, they may only be allowed to put £4,000 in.
With tax relief, it can make pensions extremely attractive, especially for high earners because when you withdraw money from the pension, you will likely pay a lower tax amount. The pension should also grow over time depending on investment returns so the amount available will hopefully be larger than the amount you put in.
No, you can access the pension before then providing you are old enough. Currently, this sits at 55 but it’s more likely to be around the age of 57 or 58. You don’t have to be receiving your state pension and can still be working, although this will have implications for the level of tax you pay. You do not have access to your pension as soon as it is available, and depending on your circumstances it may be advantageous not to.
Provided you are old enough, there are various ways you can access your pension. Currently, you can receive 25% of your pension tax-free. So if you had £200,000 you could receive £50,000 without paying tax. Any remaining amount would be taxable based on other earnings. You can choose to take some of the tax-free cash in one go or in stages. With income, you can vary the levels depending on your needs. You can purchase an annuity that will provide a fixed income for the rest of your life.
This used to be the main way that people used their pension to provide an income. A pension annuity is a financial product that pays you a guaranteed income for a fixed period or for the rest of your life. When you retire, you can choose to use some or all of your pension savings to buy an annuity. You do not have to buy an annuity with your pensions.
For most people their company pension schemes will be a Defined Contribution Scheme, meaning they make a contribution to the pension plan which their employer also contributes towards. The amount varies depending on the employer and the generosity of their scheme. This money will be invested into a pension fund (normally the default option on the scheme) in the hopes it will grow over time. The amount your pension will be worth all depends on how much has been contributed, what investment returns you receive and what the costs of the fund are.
Some people may have a Defined Pension Scheme through their employer. This is extremely rare in the private sector although people in the public sector still receive these.
This is a form of pension that provides you with the promise of income when you reach the scheme’s retirement age. You can also receive a tax-free lump sum from the pension.
Although you will likely contribute to the plan along with your employer, there isn’t a pot of money available in the same way as the Defined Contribution Scheme. For each year you contribute you will be entitled to more pension income when you retire. The amount depends on your scheme and its terms.
For example, a 1/60th scheme will mean that for each year you will earn 1/60th of your earnings. If it is a financial salary scheme it will be 1/60th of your final salary or it may be based on the earnings over the span of your career. In this example, if you were a member for 30 years you receive half your final salary or half your career average earnings.
Each Defined Pension Scheme will have its own rules that dictate what your pension will be and how much you have to contribute.
Although there is no pot of money in the same sense of the Defined Contribution Scheme, for Defined Benefit Schemes there is a Cash Equivalent Transfer Value. This is the amount the scheme will give you to forego the benefits of the income you will receive when you retire. The transfer value will be dependent on many factors.
It is possible to transfer the Defined Benefit Scheme, although for most people it would be more beneficial to remain in the scheme. If your transfer value is over £30,000 you would have to take professional advice on whether the transfer in is your best interest. There are many factors to consider when decided if this is the right approach.
Most public sector schemes won’t allow you to transfer.
There are lots of options regarding how you invest your pension and it will depend on the type of pension you have. For most people, you will invest in a mutual fund that can be invested in different assets such as shares, stocks, bonds, property etc.
The amount you have invested in each asset will depend on the type of fund you use and its’ risk level. You can invest in more than one type of fund and can invest across a range of funds. The number of funds available will vary by each pension provider.
If you have a SIPP or a SSAS you can invest directly in commercial property.
Part 2 coming tomorrow
This article doesn’t constitute financial advice and is intended as information only. Should you need financial advice you should speak to a trusted financial adviser. Remember the value of your pension can go up as well as down and there is no guarantee you will get more than you put in.
For brevity purposes not all elements of the answers are included, and you should do further research or get in touch directly should you want more information.
