- Definition of what a pension is
- United Kingdom options (defined benefit & defined contribution)
- Overseas options (including QROPS)
- Why pension transfers are used
- Pension benefits
- Pension drawbacks
- HMRC & the pension regulators’ involvement
- Rules and regulations
- Rule changes
- Pension reform
- Pensions and investments
Technical explanation of a pension
A legal structure (known as a wrapper) which allows any investments held within it to benefit from an advantageous tax treatment.
Defined benefit plans are employer funded schemes. The most popular variant are final salary schemes though other variations including career average earnings exist.
Defined contribution plans can be either private or occupational offerings. Many variations exist including Stakeholder Pension (SHP), Self Invested Personal Pension (SIPP), and Additional Voluntary Contributions (AVC).
A stakeholder pension has to follow stricter Government rules than other forms of Personal Pension Plans (PPP). These include limits to charges that can be applied, the ability to alter your contributions without penalties and the option to move provider without any exit fees.
A Self Invested Personal Pension offers a wide range of investments to give you more control over how you invest.
AVCs are offered by employers of both final salary and money purchase schemes. In the former they can be used to purchase added years. Both may allow an employee to bolster their pension pot in a cost effective convenient manner.
- Pensions provide a tax efficient way of saving for retirement
- Ability to defer income tax and reduce or avoid other taxes due on your salary
UK pensions are entitled to tax relief. This can either be done from your pre-tax earnings or indirectly via salary sacrifice. The latter is an agreement between an employee & employer where the former accepts a lower salary for a confirmed pension contribution rate. The advantage to both parties is that they can pay less in National Insurance Contributions (NICs are another form of tax).
- If salary sacrifice is used a reduction in NICs paid may be detrimental to your entitlement to certain State benefits. You should consult with your employer or financial adviser regarding whether this option is beneficial or detrimental to you.
- Unable to access prior to the minimum retirement age set out by law (currently the State Retirement Age of 65 less 10 years i.e. 55) except in limited circumstances
- Potentially high penalties for not following the rules and regulations
- Responsibility of pension decisions rests with you
For example, if you engage in pension liberation you may receive a hefty tax charge & further penalties irrespective of whether you are aware of the mistake or not.
- Subject to future rule changes which may have negative impacts. One possibility comes from the change of wording in HMRC literature of the tax free lump sum to pension commencement lump sum (PCLS) which is currently zero tax rated
The Pensions Regulator regulates UK work based pensions. It’s aim is to maximise compliance of occupational pension schemes through giving appropriate guidance where required.
Private pensions must be registered with the Financial Conduct Authority (FCA) who perform the necessary UK regulatory duties.
- Minimum retirement age is 55
- Income tax relief is claimable up to the maximum of 100% of your annual earnings or your personal annual allowance whichever is lower
- Any annual allowance not used in the previous 3 tax years can be carried forward
- Those who earn less than £3,600 can contribute up to £2,880 and still receive 20% tax relief on the full amount
- The maximum pension pot that can be accrued tax free is based on the lifetime allowance. The current limit can be increased if you hold the necessary protection
The value is measured when a benefit crystallisation event occurs: either you reach 75, decide to access your pension or move your pension overseas. Exceeding the limit will leave you liable for a Lifetime Allowance (LTA) charge
Following the UK budget 2014 flexibility has increased further and pensions are set to be fully flexible from 6th April 2015 when the implementation of the latest pension changes will be enacted.
To confirm, there is no legal requirement that a pension will provide an income for the rest of your life. Further to this, the law has been altered to give annuity providers greater flexibility thereby hopefully encouraging competition in this section of the market.
These pension reforms will have far reaching positive consequences for UK pensions in general, defined contribution and defined benefit plans in their own way.
With UK pensions soon to offer full flexibility it is important to known your options on retirement and the level of income that you can safely withdraw without your pension savings becoming exhausted.