21 09 '21

What is a Pension Transfer Specialist?

A Pension Transfer Specialist is a UK qualified adviser who has taken additional qualifications to advise on pensions with safeguarded benefits.

Essentially, pensions with a promise to pay pension benefits can only be advised upon by an adviser who has the relevant qualifications. The caveat to this is if the benefits are less than £30,000, in which case the pension member can enact a transfer themselves if they wish.

https://www.gov.uk/government/publications/pension-benefits-with-a-guarantee-and-the-advice-requirement/pension-benefits-with-a-guarantee-and-the-advice-requirement

A change in the Pension Schemes Act 2015 brought about changes that made the advice of certain schemes with protected benefits mandatory.

These protected, or safeguarded benefits, are not money purchase or cash balance benefits. The pensions that are included are:

Guaranteed Pension which include Guaranteed Annuity Rates (GAR’s)
Defined Benefit/Final Salary Pensions
Guaranteed Minimum Pensions (GMP’s)
Hybrid Schemes

If a member of these schemes is considering transfer their pension benefits to a more flexible arrangement, advice by a Pension Transfer Specialist is required. These guaranteed schemes can be complex and need detailed analysis together with considering a member’s individual circumstances.

Advice is required whether, the member wishes to transfer their whole scheme, part of their scheme, take a flexible income or a cash lump sum.

A Pension Transfer Specialist needs to consider a variety of factors before providing advice. These include.

Comparing the offered guaranteed benefit to the offered transfer value to determine if the offered amount is good value. There is no fixed way of calculating transfer values against offered income as all schemes value this differently. Some schemes may offer a multiple of 20 x income and others may offer 50 x income. The more multiples of offered income against the transfer value is often seen as a more attractive offer. E.g.

Person A – is offered £20,000 at normal retirement age or a transfer value of £400,000 (20 x)

Person B – is offered £20,000 at normal retirement age or a transfer value of £1,000,000 (50 x)

This is only part of what a Pension Transfer Specialist considers, however.

They will need to determine

If the member is married
Has dependent children
What their current and future income looks like
What their current and future expenditure looks like
Has other guaranteed pension income
Has other defined contribution pensions
Has other saving both cash or investment based
Has other assets such as investment property
If the member is in good health
The stability of the safeguarded pension scheme (is it in trouble or well underfunded)
If there is any debt, mortgages or loans

On top of the above and most importantly, a Pension Transfer Specialist needs to determine the needs and objectives of a member who is considering a transfer.

One of the most popular objectives is flexibility. However, this is a too broader definition. Why do they need flexibility, when do they need flexibility, how much flexibility is required? This all needs to be quantified by the financial adviser as, without it, they won’t have a full picture of the member’s circumstances and can’t make a suitable recommendation.

In short, if a member is wanting to transfer their pension, the Pension Transfer Specialist has to be confident that their needs and objectives can’t be met by staying in their existing scheme. This has to be documented and quantified against their circumstances.

A Pension Transfer Specialist offers advice only once an agreement has been made to undertake the process. This can be either in the form of Abridged Advice or Full advice.

What is Abridged Advice?

Abridged advice is designed to help advisers filter clients for whom a pension transfer is unlikely to be suitable.

It provides a mechanism to engage with someone who wishes to discuss their possible defined benefit transfer, but without going into full advice and most importantly committing the client to the full costs of advice.

It allows the adviser to ask for some standard basic information from the client to allow them to make a decision as to which possible route is feasible.

It is an optional service advisers can offer as part of their process and has two possible outcomes.

A personal recommendation that the client shouldn’t transfer or convert their pension.
This can only be done if there is sufficient evidence from the limited information provided by the client to demonstrate a transfer isn’t suitable.

A summary that it is unclear whether the client would benefit from a pension transfer based on the limited information provided as part of the abridged advice process. The purpose of this is to then offer full advice where further information can be gather to form a solid recommendation either to transfer or stay within the scheme.

It’s important to note that the outcome from abridged advice can’t be a recommendation to transfer. This can only be possible by going through a full advice process.

Assessment

All advisers will assume a starting point that a pension transfer isn’t suitable. This follows guidelines stated in the FCA handbook.

However, as part of the advice, an adviser should determine if staying within the scheme is also suitable. For example, the scheme could be well underfunded and at risk of failing.

The areas an adviser should consider and assess as part of the abridged advice process are:

Intention of when the client wishes to access the pension
The risks of staying in the current scheme
The risks of transferring from a guaranteed income to a flexible benefit scheme.
The views of a clients need for a guaranteed income
The client experience, views and knowledge of investments. Has the client managed an of their own investments in the past.
Has the client paid for advice in the past
How much income does the client need in retirement and how much of this is met by the current pension benefits. What would be the impact of losing this guaranteed income.
Are there any other ways to achieve the clients objectives from other funds/income
The client own personal attitude to investment risk

An adviser offering abridged advice should offset the cost of the advice against the cost of full advice if the client were to go down that route. This is to ensure the client isn’t charged twice for the same work.

The new advice process to include abridged advice came into effect in Oct 2020 and was designed to help more people access advice in this area without potentially incurring full advice fee’s.

Due to the nature of the new form of advice, however, many advisers were initially nervous about offering the service.

Without any previous experience of the pitfalls and potential exposure to risk for advice firms, many felt staying away from offering such a service would protect their business.

Already, a year into the new form of advice, questions are already beginning to be made about its suitability and efficiency of it.

Advisers are asking for the format to be tweaked. Over the course of the last year, situations have arisen which may not have been thought of when designing the concept.

For example, a lifetime allowance issue may come up which is relevant to the client, not the transfer, but under the abridged advice rules, this can’t be discussed.

Further discussion on the subject can be found here https://www.ftadviser.com/pensions/2021/09/09/abridged-advice-needs-to-be-tweaked-industry-says/

As a concept, we believe abridged advice is a good idea as it allows people potential access to advice without the full cost usually associated with it.

Also, read about what affects defined benefit transfer values

However, as with any new process, there are further improvements that could be made to make the experience smoother and more appropriate.

12 08 '21

Transferring a Million+ Pension

Client Situation

£1,400,000

No spouse, 2 children
Age 55
Has other deposit based savings of £350,000
Has no debt
Outgoing of £40,000 per annum
Plans to work until 65 with an income of £80,000

Are you in a similar situation?

Request a consultation

Learn more about transferring assets here

I reviewed a client who had concerns over their Defined Benefit Scheme’s suitability. They were considering a transfer for a number of reasons and wanted to understand the benefits and implications of it.

One of their main concerns was their current schemes health. Three years previous, they had been offered a reduced transfer value as the scheme was well underfunded and they wanted to clear the liability off their books. At that time the client didn’t consider it as he didn’t want to take a lower offer. As the scheme had now offered him a full value transfer value he felt it might be worth transferring. He was aware of the Pension Protection Fund, which guaranteed a percentage of the original offered income if schemes fail, but this has a cap.

Currently 2021/2022 the limits are £37,315 for a 65 year old, £31,275 for a 60 year old and £26,884 for a 55 year old. As the clients pension had promised to pay around £55,000 at 65, this was a big concern for him. If the scheme failed, he would only come away with a fraction of what he was promised.

Another concern was the loss of benefits back to the scheme if he were to die before getting value out of it. Having had a cancer scare a few years previous, this objective was high on his list. With no wife or dependent children, no one would be entitled to the benefits. He had 2 children, out of marrage and therefore wanted any remaining benefits to be passed to them. The only way this would be possible would be a transfer the scheme.

The client had a good amont of deposit based savings to fall back on, which would continue to grow with his disposable income until retirement at 65.

A transfer was recommended which met his objectives of:

* avoiding a scheme failure which would result in a lower guaranteed income;
* transferring the assets into his control so he had more flexibility and importantly allowed him to pass assets onto his two children;
* increased his overall wealth without increasing his inheritance tax liability (pension scheme assets are not calculated as part of the estate on death)

There was a lifetime allowance discussion given the size of the fund value, however, we deemed it still appropriate given the risks of not transferring and being unable to meet his objectives.

A full cashflow forecast was created as part of the advice process which showed a more than sustainable wealth over his retirement, with the added benefit of being able to pass funds to his children.

08 12 '24

Retirement Planning for Early Retirement

When considering early retirement, creating a detailed and realistic retirement budget is essential. This process involves assessing one’s financial readiness by evaluating all expenses, including housing costs, living expenses, borrowing costs, and travel expenses. Furthermore, it is important to take into account total savings, debts, and the various pension options available, such as State Pensions, defined benefit pensions, and personal pensions.

Often overlooked, long-term care costs also need to be factored into the budget. Understanding the rules surrounding authorised pension withdrawals will help individuals make informed decisions about their early retirement plans. By thoroughly reviewing these financial elements, individuals can better position themselves to achieve their retirement goals.

Early retirement planning often involves complex considerations, such as inflation risk and the impact of legislative changes. Financial advisers can provide valuable insights on how to build a sustainable income stream, manage debt, and utilise tax-efficient savings vehicles. Additionally, they can help individuals understand the implications of early pension withdrawals and how these might affect their overall retirement income.

By engaging with a financial adviser, individuals can gain a clearer understanding of their financial situation and develop a tailored plan to optimise their retirement savings. This proactive approach can help mitigate potential financial challenges, ensuring a more secure and fulfilling early retirement.

Calculating Your Retirement Budget

Calculating Your Retirement Budget: Key Considerations

Planning for early retirement necessitates a comprehensive evaluation of one’s financial resources and expenses to ensure long-term financial security. When assessing retirement income, individuals need to think about how much income they would need in retirement.

It’s often difficult to visualise but a good trick is to imagine you are retiring tomorrow. Think about the debt you would have paid off such as mortgages or car finance. Think about reduced costs such as commuting and lunch expenses. There could also be savings with children probably have left the family home.

Now, think about how many holidays you’d like to go on and what annual costs you’d be prepared to spend. Do you need a new car, or will extra money be needed for a golf club membership?

Effective withdrawal management is essential to sustaining financial stability throughout retirement. Comparing current and retirement budgets can help identify potential shortfalls and inform strategies to mitigate these risks.

A commonly cited approach, known as the 4% rule, suggests withdrawing 4% of total savings annually to maintain retirement funds. It’s also important to plan for tax-efficient withdrawals and consider potential increases in healthcare and care expenses over time.

Adjusting withdrawals in response to investment performance and market changes can further enhance financial resilience. Moreover, evaluating the budget planner’s ability to categorize costs into essential and non-essential items helps ensure that financial needs are prioritized effectively, especially considering factors such as life expectancy.

Ultimately, individuals should aim to create a detailed and realistic budget that accounts for all sources of income and expenses, allowing them to make informed decisions about their retirement planning and optimise their financial resources.

Understanding Pension Options

Understanding Pension Options for Early Retirement

Planning for early retirement requires a thorough understanding of the various pension options available. To build a secure financial future, it’s essential to grasp the different types of pensions, each with its own set of benefits and considerations.

At the heart of the pension system is the State Pension, a government-provided scheme based on National Insurance contributions and age. There are two distinct types of State Pensions: the Basic State Pension, which applies to those who reached the State Pension age before 6 April 2016, and the New State Pension, applicable to those reaching the State Pension age on or after 6 April 2016.

The amount you receive from the State Pension depends on your National Insurance record. The maximum new State Pension is currently £221.20 per week (2024/25).

Employer-sponsored workplace pensions, including defined benefit and defined contribution plans, offer a second layer of retirement savings.

Defined benefit schemes guarantee a specific income in retirement, calculated based on salary and years of service. In contrast, defined contribution schemes build a pension pot over time based on contributions made by both you and your employer and the performance of investments.

Personal pensions provide a flexible and autonomous way to save for retirement. These individually established plans are typically defined contribution schemes, allowing you to tailor your contributions and investment options according to your needs.

Personal pensions also offer tax relief up to certain limits, enhancing their appeal as a retirement savings vehicle. The flexibility in pension contributions means you can pay into multiple pension schemes, depending on the funds available.

Understanding these pension options and how they can be combined to meet your financial goals is indispensable to optimising your retirement planning. By considering the State Pension, workplace pensions, and personal pensions, you can create a comprehensive retirement strategy that aligns with your ambitions and ensures financial security in your later years.

Managing Care Costs

Managing care costs presents a significant challenge for many individuals. As part of a comprehensive retirement plan, including pension options, it’s important to consider the financial implications of care costs.

The average annual expenditure for care in the UK ranges from £49,348 to £62,192, depending on the type and level of care required. Regional variations are pronounced, with areas such as London handling higher costs due to living and employment expenses.

Funding for care costs primarily relies on self-funding, supplemented by means-tested local authority support for those with capital below specific thresholds. In England, the current threshold stands at £23,250, though reforms propose an increase to £100,000 and a lifetime cap of £86,000 on personal care costs, set to be introduced in October 2025.

Effective management of care costs necessitates a careful wealth planning strategy. Various financial products, such as immediate care annuities, can provide a guaranteed income for life to cover care costs. Care homes may use higher private fees to cross-subsidise residents funded by councils, known as cross-subsidisation.

Additionally, strategic planning, including tax considerations, can help manage financial burdens. Maintaining an emergency fund and consulting with professionals to model different scenarios and manage care costs effectively can offer peace of mind and financial stability.

Given the complexity of care costs and funding options, it’s vital to stay informed about ongoing reforms and regional differences. Understanding the mechanisms of care funding, including the distinctions between personal care costs and daily living costs, can help individuals make more informed decisions about their financial future.

For a more tailored approach, it’s advisable to consult with a professional adviser.

Navigating Tax and Benefits

Managing tax and benefits is a key element in retirement planning, particularly for those aiming for early retirement. Understanding the tax implications affecting pension income is vital to ensure you maximise your retirement funds.

For the 2024/2025 tax year, pension income exceeding the Personal Allowance of £12,570 is subject to Income Tax, with rates of 20%, 40%, and 45% applying to incomes above £50,270 and £125,140, respectively.

It is important to consider that under current rules, only the first 25% of pension withdrawals are tax-free, with the rest taxable at your marginal income tax rate. Early pension withdrawals before age 55 can incur significant tax penalties if unauthorised.

Pension savers should be aware of the annual allowance, which limits the amount that can be saved into a pension each year with tax relief. This allowance is £60,000 in 2024/25, and it’s tapered for higher earners.

By understanding these tax implications and planning strategically, individuals can make informed decisions about their retirement income and ensure they’re making the most of their pension savings.

The abolition of the lifetime allowance in 2023 has removed a significant restriction for pension savers.

However, the inclusion of unused pension funds and death benefits in Inheritance Tax (IHT) from April 6, 2027, will require careful planning for those with significant pension pots.

The UK pensions tax system continues to evolve, making it essential for individuals to stay informed about the latest changes and how they might impact their retirement plans.

Normally, you can access most personal and workplace pensions from 55 years old, which will rise to 57 from 2028.

Conclusion

When planning for an early retirement, it is important to meticulously assess your financial situation to ensure you have the necessary resources for a sustainable post-work life. This involves evaluating both essential and discretionary expenditures to create a comprehensive retirement budget.

Understanding pension options is also a key component. This includes knowing when you can access your State Pension and how to make the most of private and workplace pensions, which may allow for early withdrawal but come with significant tax implications.

Effective planning for long-term finances, managing care costs, and considering tax and benefits are essential elements of early retirement planning. By engaging in detailed financial planning and seeking professional advice, individuals can make informed decisions that help achieve a stress-free and financially secure early retirement.

In the context of early retirement, it is beneficial to optimise savings through tax-efficient vehicles such as ISAs and pensions. Reviewing and regularly updating your retirement budget ensures that any changes in your financial situation are accounted for, helping you maintain a sustainable lifestyle in retirement.

By taking these considerations into account and engaging with financial professionals, individuals can better prepare for the challenges and opportunities that early retirement presents.

05 12 '24

How Do Gilt Yields Affect Defined Benefit Transfer Values

When considering a defined benefit pension transfer, it is important to understand the significant impact that gilt yields have on transfer values. An increase in gilt yields can lead to a substantial decrease in the transfer value of your pension. For instance, a pension worth £10,000 per annum could see its transfer value drop by a considerable amount, from £250,000 to £130,000 as has done in the last 5 years.

Gilt yields are a key factor in determining the cost of providing guaranteed income from defined-benefit pensions. As gilt yields rise, the cost of provisioning this income decreases, thereby lowering the transfer value. This inverse relationship between gilt yields and transfer values is pivotal in understanding how to maximise the transfer value of your pension.

In the context of defined benefit pensions, the relationship between gilt yields and transfer values is multifaceted. Higher gilt yields mean that the fund required to generate a set level of income is reduced, resulting in lower transfer values. This dynamic is central to the valuation of defined benefit pensions and highlights the importance of staying informed about market trends and their implications if you’re considering a transfer.

It is also worth noting that fluctuations in the economic environment, inflation expectations, and overall market conditions can cause gilt yields to change significantly. These factors can lead to sudden and significant changes in transfer values, underscoring the importance of monitoring the market to determine when you might look to transfer.

Impact of Rising Gilt Yields

Rising Gilt Yields: The Impact on Defined Benefit Transfer Values

Defined benefit (DB) pension holders have witnessed a significant decline in transfer values over the past year, predominantly due to the surge in gilt yields. This shift has led to a substantial reduction in transfer values, with some seeing a drop of over a third.

For instance, a pension worth £10,000 per annum payable from 65 could have seen its transfer value plummet from approximately £250,000 to £130,000.

The increase in gilt yields has been particularly pronounced, halving the value of compensation received following a DB transfer in some cases. This is because higher gilt yields reduce the value of liabilities of a scheme, improving its solvency and consequently decreasing transfer values.

With higher returns anticipated on a pension scheme’s assets, the sum of money needed by a scheme to pay a member’s pension decreases, directly impacting transfer values. As a result, transfer values have experienced dramatic drops, with some falling as much as 30%.

The significant decline in transfer values has also seen a corresponding decrease in transfer activity, as individuals become more cautious about making irreversible decisions that could impact their retirement. This highlights the need for high-quality support and advice to ensure that pension scheme members are making well-informed decisions about their pensions.

Impact on Pension Schemes

The financial health of a pension scheme is inextricably linked with gilt yields, particularly for defined benefit (DB) pension schemes. A rise in gilt yields generally improves the funding positions of these schemes. This improvement occurs because the cost of providing guaranteed income falls dramatically, reducing the present value of pension fund liabilities and enhancing their funding ratios.

However, a sharp rise in gilt yields can also pose challenges for pension schemes utilising liability-driven investment (LDI) strategies. These strategies, which involve using derivatives and repos to hedge against market volatility, become problematic when gilt yields rise too far and too fast.

Pension schemes may find themselves needing to provide emergency collateral to LDI funds swiftly, leading to forced selling of gilts. This forced selling can create a downward spiral in gilt prices, exacerbating the problem.

The consequences of rising gilt yields for pension schemes can be significant, leading to mark-to-market losses and triggering large margin calls that require posting additional collateral or selling assets. The UK gilt crisis in 2022 highlighted these vulnerabilities, underscoring the importance of adequate liquidity and risk management in pension schemes to help them better withstand such market shifts.

Pension schemes that are heavily invested in gilts, particularly those with LDI strategies, need to manage their exposures carefully. A sudden spike in gilt yields can lead to rapid changes in their funding positions, necessitating swift responses to mitigate potential risks.

In such scenarios, having sufficient liquidity and a well-thought-out risk management strategy is essential to help mitigate the adverse effects of rising gilt yields and maintain the financial stability of the pension scheme.

Moreover, the impact of rising gilt yields on DB transfer values is also significant, as higher yields can lead to lower transfer values due to the decreased present value of the pension liabilities lower transfer values.

Understanding the complex interplay between gilt yields and pension schemes is critical for those managing these schemes. By closely monitoring market developments and adjusting strategies as needed, pension schemes can aim to optimise their funding positions and better manage their liabilities in the face of changing gilt yields.

Recent Trends in Defined Benefit Transfer Values

Recent Trends in Defined Benefit Transfer Values

The UK gilt market has experienced significant fluctuations, leading to a substantial impact on defined benefit transfer values. In 2022, transfer values plummeted by approximately 35-40% due to soaring gilt yields, with the third quarter seeing a particularly sharp decline.

This dramatic shift even prompted government intervention, with £65 billion of gilts purchased to stabilise the market.

Higher gilt yields have generally improved the funding positions of DB schemes but have markedly reduced transfer out values. Over short periods, transfer values have been known to drop dramatically, falling by as much as 30% over just a few weeks.

Despite attractive annuity rates, transferring out of a DB pension remains a complex decision requiring quality support and financial guidance.

Recent data indicates that transfer activity has stabilised, with only small incremental changes observed. However, scam warning signs remain high, underscoring the need for careful and informed decision-making when considering a transfer.

The overall trend in transfer values has been one of decrease, with typical cash equivalent transfer values (CETVs) for a 60-year-old member decreasing by around 3% for inflation-linked increases and around 2% for fixed increases over the past year.

The changing landscape of DB schemes, including their increasing focus on buyout preparations and the abolition of the Lifetime Allowance, may further influence transfer value trends and member options. As such, it’s essential for individuals and trustees to stay informed about market developments and regulatory changes that may impact DB transfers.

Furthermore, research findings by OAC show that the value of compensation for DB transfers has halved in the third quarter of the year due to rising gilt yields, highlighting the critical importance of informed decision-making when considering a transfer.

Importance of Financial Advice in Transfers

Pension transfers involve complex decisions that require a thorough understanding of the factors influencing defined benefit (DB) transfer values. Working with a financial adviser specialising in pensions is essential to ensure you receive guidance tailored to your individual circumstances.

Financial advisers play an important role in evaluating an individual’s financial situation and retirement goals, providing clear information on potential outcomes and risks. They help individuals make informed decisions based on their unique circumstances, which is vital given the potentially irreversible nature of pension transfers.

Ongoing support and advice are necessary for individuals considering pension transfers. A financial adviser should monitor changes in gilt yields and their impact on transfer values, offering regular updates and reassessments as needed.

This continuous support enables individuals to adapt to changing market conditions, making more informed decisions that could impact their retirement.

The Financial Conduct Authority (FCA) emphasizes the importance of professional advice in pension transfers, particularly when transferring from a DB scheme to a defined contribution (DC) scheme. For transfers worth over £30,000, it’s mandatory to seek advice from a regulated financial adviser.

30 05 '24

Can I withdraw my pension pot to my bank account

Can I Transfer My Pension to My Bank Account

In short, yes, you can transfer your pension pot to your bank account, but whether it’s a good idea depends on your personal circumstances. The decision should be based on the size of your pension pot and your personal income tax situation. Be mindful of the potential tax liabilities, as withdrawing your pension all at once could push you into a higher tax bracket. Let’s look at the options and consequences.

How to access pension income

When it’s time to access your pension income (currently from age 55 but moving to age 57 by 2028), you’ve got several options like pension drawdown, annuities, or taking a lump sum. Each method comes with its own set of tax rules and implications, so it’s important to understand them thoroughly before making a decision.

Whether it’s a workplace pension or a personal pension, the same rules generally apply. Although some workplace pension schemes offer ‘protected rules’ (check for these with your scheme administrator).

Firstly, the most popular option is pension drawdown, you can withdraw money from your pension pot while the remaining funds stay invested, potentially growing over time. This option gives you flexibility to access your pension as needed, but you’ll need to manage it carefully to make sure it lasts. Tax rules here mean you might pay income tax on the money you withdraw, depending on your total income for the year.

Alternatively, you can purchase an annuity, which converts your pension savings into a regular, guaranteed income for life or a fixed period. Annuities provide financial security, but once purchased, they typically can’t be changed. Understanding the tax implications is important, as your annuity payments are usually subject to income tax.

If you opt to take it all as lump sum, you can take tax-free funds up to 25% of your pension pot. However, taking money from the remaining 75% might push you into a higher tax bracket, resulting in a substantial tax bill. This approach is generally less tax-efficient for larger pension pots.

Withdrawing to a bank account versus staying invested

Some people feel like they’d prefer to have the pension funds in a bank account rather than keeping it invested with a drawdown. Bank accounts feel safer to those people than the risk of staying invested.

When deciding whether to withdraw your pension funds to a bank account or keep them invested is a personal choice, but you need to understand the implications of each. If you choose to transfer your pension into a bank account, you gain immediate access to your funds, offering liquidity and ease of management. This can be particularly appealing if you have immediate expenses or prefer the security of cash holdings. However, bear in mind that the interest rates on bank accounts (although higher at the moment) are typically low over the long term and might not keep pace with inflation, potentially eroding your purchasing power over time.

On the other hand, staying invested in your pension allows you to benefit from potential market gains and compound interest. Investments in diversified portfolios can yield higher returns compared to the modest gains from savings accounts. This approach suits individuals with a longer time horizon and a higher risk tolerance, as it involves exposure to market fluctuations. Staying invested can also provide a buffer against inflation, preserving your wealth in the long run, although this isn’t guaranteed.

It is important to understand that although investing is more volatile (ups and downs) than cash, history says it’s substantially more rewarding.

This chart from Nutmeg looks at Cash, Inflation and Investing since 2000.

Cash v Investing

Investing in this example has yielded roughly three times the returns of cash. So, for example, if you invested £100,000 over this time frame, you’d have around £165,000 in cash or £400,000 to £450,000 if invested.

Nevertheless, investing carries its own risks, including the possibility of market downturns, so if you need your funds in the short term (less than five years), cash may be a better option.

Can I withdraw all my pensions at once?

You can withdraw all your pension at once, but it’s important to understand the tax implications and potential impact on your retirement income. When you have a defined contribution pension, you can withdraw the entire pension pot in one go. However, only 25% of this amount is tax-free. The remaining 75% will be taxed as earnings, which could push you into a higher tax bracket for that year.

Before making a full withdrawal, consider how this decision will affect your long-term financial stability. Withdrawing your entire pension pot means you’ll need to manage the remaining funds wisely to ensure they last throughout your retirement. This immediate access might seem tempting, but it could leave you with insufficient income later.

Moreover, the tax implications are significant. If you withdraw a large sum, the taxable portion could be substantial, resulting in a hefty tax bill. It’s essential to calculate these implications beforehand to avoid unexpected financial strain.

Generally, it’s a good idea to take only enough money to live on month to month rather than withdrawing your money in full.

Additionally, withdrawing your pension pot in one lump sum can impact your eligibility for means-tested benefits and might affect your ability to manage debts effectively.

Withdrawal Process Steps

To initiate a pension withdrawal, you need to meet the minimum age requirement of 55 or qualify for an exception due to specific circumstances like ill health. Once eligibility is confirmed, the next step involves deciding how much of your savings you want to access.

First, review your pension provider’s terms and conditions for withdrawing cash from your pension. These typically outline the process for transferring your pension savings into a format that allows you to receive payments. If you’re considering a lump sum, note that the first 25% is usually tax-free cash, while the remaining 75% is subject to income tax.

Contact your pension provider to obtain the necessary forms and documentation or seek financial advice. You’ll need to complete these forms accurately and provide any required identification or verification documents. This process ensures that your request to transfer your pension is legitimate and compliant with regulations.

If you decide to take your pension in one go, without advice, your provider won’t be able to tell you if that’s the most efficient form of withdrawal. They’ll be able to take instructions and offer warnings but won’t advise you not to do it. This is an important advantage of taking regulated financial advice as an adviser will assess your circumstances and advise you on the most tax-efficient and sensible option. If you decide to take out all your pension without advice and then discover you’ve got a huge tax bill, you can’t reverse the decision.

Submit your completed forms to your pension provider, who’ll process your request. Once approved, the cash from your pension will be transferred to your bank account after it’s been reported to HMRC and they’ve taken any income tax due. Keep in mind that processing times can vary, so it’s important to follow up with your provider if there are delays.

Timeframe for Withdrawals

Once you’ve submitted your completed forms to your pension provider, the timeframe for withdrawals can vary depending on several factors. The process isn’t as immediate as a standard bank withdrawal because your investments need to be sold and converted into cash before transferring to your bank account. This selling process can take anywhere from a few days to a week for the investments to settle (converted from shares to cash).

When you make an income request, your pension provider must first liquidate the necessary investments. The time it takes for these transactions to complete depends on the type of investments held within your pension funds. For instance, some investments might settle within a couple of days, while others could take up to a week.

After the investments are sold and the funds are available, the payment timeframe can still vary, largely determined by the method of transferring the funds. If your provider uses BACS (Bankers’ Automated Clearing Services), the transfer could take up to three days. In contrast, CHAPS (Clearing House Automated Payment System) allows same-day transfers but might incur additional fees. Alternatively, Faster Payments can also offer quicker transfers, typically within hours, but this depends on the provider’s policies.

Different pension providers have distinct schedules for disbursing funds. Some might only process payments once a month during their income run, while others may release funds as soon as they’re available.

It’s important to consult with your pension provider to understand their specific payment timeframe and make sure your income request is processed promptly.

Tax Implications of Withdrawals

Understanding the tax implications of withdrawing from your pension is really important for effective financial planning. When you decide to make withdrawals from your pension pot, you need to be aware that not all the money you receive will be tax-free. Typically, 25% of your pension savings can be withdrawn tax-free, while the remaining 75% is considered taxable income.

Flexible pension payments allow you to access your pension pot in a manner that suits your financial needs, but they come with their own tax implications. The taxable portion of your withdrawals will be added to your other sources of taxable income for the year, which could push you into a higher tax bracket, thereby increasing your overall tax liability.

Moreover, the way tax is collected on these flexible pension payments can also impact your finances. Pension providers may use an emergency tax code initially, which could result in an overpayment of tax. It’s essential to plan your withdrawals carefully to avoid unexpected tax consequences and make sure that you aren’t paying more tax than necessary.

Here is an example of withdrawing £20,000 and how an emergency tax code could affect how much you receive. We assume there is no other taxable income in this example.

Tax Charged on Month 1 Basis:

Tax Rate	Amount Taxed	Tax Payable
0%	£6,047.50	£0.00
20%	£3,141.67	£628.33
40%	£7,286.67	£2,914.67
45%	£3,524.17	£1,585.88
Total	£20,000.00	£5,128.88

Total net withdrawal: £14,871.13 (this is the amount you’d receive after emergency tax)

The total you’d receive once the correct tax has been paid is £19,514.

Reclaiming Overpaid Pension Tax

If you’ve ended up paying more tax on your pension withdrawals than necessary, you can reclaim the overpaid amount through HM Revenue and Customs (HMRC). This situation can arise when your pension provider applies an incorrect tax code to your withdrawals, or if it’s the first payment you’ve received from your pension. To start reclaiming overpaid pension tax, you’ll need to submit a claim to HMRC, providing evidence of the overpayment.

Once you have your evidence ready, you can proceed to submit your claim. HMRC offers various forms tailored to different situations. For instance, if you’ve taken a lump sum payment, you might need Form P53Z, while other forms like P55 or P50Z are used for different types of pension payments. Make sure you select the correct form to avoid delays in processing your refund.

After submitting your claim, HMRC will review the provided evidence. If they confirm that an overpayment has occurred, they’ll issue a refund for the excess tax paid. The review process might take a few weeks, so patience is essential. Keeping a copy of your claim and all submitted documents can help track the progress and address any follow-up queries from HMRC.

Seeking Professional Advice

Consulting a financial adviser is often worth the commitment to ensure you’re paying the least tax and optimising your returns. A financial adviser can provide you with a thorough understanding of the implications and consequences associated with transferring your pension funds. They can help you assess the long-term effects and potential risks involved, ensuring that you make an informed choice tailored to your specific individual circumstances.

A financial adviser can assist you in exploring alternative options that may better suit your needs. For instance, instead of taking the whole pot directly into a bank account, you might consider options like pension drawdown or annuities.

Book an appointment to discuss your Pension.

23 04 '24

Your Guide to UK Pensions while Retiring Abroad

Why Can’t I Access My UK Pension Abroad

You might struggle to access your UK pension abroad due to various regulatory and financial hurdles. Depending on whether it’s a defined benefit or defined contribution pension, the rules, tax implications, and ability to find the right advice vary considerably.

Transferring a pension can encounter high international fees and adverse currency exchange rates. To properly manage this, you’ll need to consult a financial advisor who is well-versed in expat pension transfers and tax obligations.

Additionally, if considering a QROPS, verify its compatibility with your scheme and brace for potential tax charges. Understanding the challenges before you start will help you prepare the right steps to take.

How do I access my pension if I move abroad?

How do I access my pension from abroad

If you’re planning to move abroad, it’s important to explore the options for accessing your UK pension savings effectively and legally. Whether you choose to leave your pension pot in the UK or transfer your pension to your new country of residence, you should be aware of the different tax implications and regulations that come with each option, including those related to the UK state pension.

Leaving your pension in the UK can be simpler, but accessing your money may involve international transfer fees and potential currency exchange impacts when you retire abroad, which can significantly affect your financial planning. On the other hand, transferring your pension abroad might seem appealing, especially if you’re considering a move to a country with a Qualifying Recognised Overseas Pension Scheme (QROPS). This option can offer tax benefits and may simplify your financial management.

It’s also important to understand your UK State Pension when you reach state pension age and the way this is paid in your new country of residence. Many expats retain a UK bank account to accept pension payments, which providers often prefer.

Are you ready to transfer your Pension overseas? Take Our Expat Pension Quiz!

Why can’t I move my UK pension now I’ve moved abroad.

Why can’t I move my UK pension now I’ve moved abroad

While you might’ve considered transferring your UK pension abroad, several regulatory hurdles can complicate this process once you’ve relocated. Initially, if you’re thinking about claiming your state pension, it’s important to understand that while the state pension can be claimed abroad, different rules may apply depending on your new country of residence. Issues such as whether your pension will increase with inflation depend largely on whether the UK has a social security agreement with your new country.

These are the countries and areas where inflation will still be paid:

the European Economic Area (EEA)
Gibraltar
Switzerland
countries where a social security agreement with the UK exists (except in Canada or New Zealand)

For private pensions, considering a Qualifying Recognised Overseas Pension Scheme (QROPS) might seem like a viable option. However, the tax implications can be significant. A 25% tax charge might apply to transfers if specific conditions aren’t met. Additionally, HMRC continues to apply its rules for ten years after the transfer, meaning you could face ongoing tax obligations in the UK even after leaving.

One of the biggest hurdles is if your existing provider, for example, Phoenix Life or Reassure, doesn’t offer pension income access. Many pension providers are used in the accumulation stage but don’t offer access to popular pension income strategies such as flexible drawdown. In this instance, people usually have to transfer their pension to another provider who offers drawdown pensions.

However, the problem exists if you are already living abroad, as most providers require proof of a UK residential address to set up the income plan. I speak to numerous expats who are frustrated and feel stuck in their schemes with seemingly no way to access the income.

However, some providers offer international SIPPs that specialise in accepting UK pensions for people living abroad. Schedule a call with me to find out more.

What options do I have to transfer my pension overseas?

What options do I have to transfer my pension overseas

You have several options for transferring your UK pension overseas, each with unique implications and requirements. One of the most suitable methods is moving your pension to a Qualifying Recognised Overseas Pension Scheme (QROPS). The QROPS system was specifically designed for such pension transfers, ensuring that your funds are transferred efficiently and in compliance with international regulations.

Before you consider a pension transfer, it’s important to check whether your current UK pension scheme permits transfers to a QROPS. You’ll need to complete Form APSS 263 and submit it to your pension scheme administrator. Be meticulous with the details, as any missing information can lead to a hefty 25% tax charge.

It’s also important to understand the tax implications involved. If the QROPS is located in the European Economic Area (EEA) or Gibraltar and you reside outside these areas, you might face a 25% tax. Conversely, if the QROPS is outside these areas and you live in the same country, there could be no tax.

Lastly, don’t forget to consult the UK government International Pension Centre. They can provide important information and assist you in dealing with the complexities of transferring your pension abroad, ensuring you’re fully informed every step of the way.

Are you ready to transfer your Pension overseas? Take Our Expat Pension Quiz!

Where can I invest my UK pension now I’ve moved abroad?

Having considered the mechanics of transferring your UK pension to a QROPS, let’s explore where to invest these funds once you’ve relocated abroad. Choosing where to invest your pension overseas requires careful consideration. When you transfer your UK pension, selecting a reputable QROPS provider is important. These providers offer various investment options that can align with your financial goals and risk tolerance.

Investing through a QROPS can provide flexibility, allowing you to tailor your investments to suit your new circumstances abroad. Depending on the specific QROPS provider and the regulations of the host country, you’ll find opportunities ranging from stocks and bonds to mutual funds and real estate investments. Understanding the tax implications associated with these investment choices is necessary. Different countries have different tax treaties with the UK, which can affect the efficiency of your pension investments.

The choice of investments is wide-ranging, and some are high-risk. Always speak with a qualified financial adviser who will have already conducted their due diligence on any recommendations they’ll be making. TIP: Some unscrupulous advisers abroad operate in a less regulated environment than the UK. Seeking advice from a UK FCA registered adviser offers more protection.

What tax do I pay on my UK pension when I’m drawing it abroad?

What tax do I pay on my UK pension when I’m drawing it abroad

When drawing your UK pension abroad, the taxes you’ll pay depend heavily on both the UK’s regulations and the tax laws of your country of residence. Initially, up to 25% of your UK pension can be withdrawn as a tax-free lump sum under UK tax rules. However, this doesn’t automatically exempt it from taxation in your new country of residence; local tax laws and the UK government may still require you to pay tax.

For the remaining 75% of your pension, which is treated as income, your UK pension provider will deduct UK income tax. This could initially be at an emergency rate, potentially overestimating your tax obligation. It’s important to update your tax code with HMRC to make sure subsequent withdrawals are taxed correctly.

Moreover, the tax on pension income can be further complicated by the foreign pension payment rules in your country. To avoid the risk of double taxation—where both the UK and your country of residence tax the same income—check if there’s a double taxation treaty in place. Most of these treaties favour taxing pension income only in the country of residence. Informing HMRC of your non-UK residency and the relevant treaty can result in them stopping UK tax deductions on your withdrawals, aligning with these agreements.

Conclusion

Managing your UK pension from abroad can be challenging, but it’s manageable with the right knowledge and strategies. Make sure you’re familiar with the regulations in your new country and any tax implications.

If transferring your pension, explore all options and perhaps consult a financial advisor. Remember, staying informed and proactive about managing your UK pension will help secure your financial stability overseas.

Embrace your new adventure with confidence, knowing your finances are well arranged.

Book an appointment for my International Pension Transfer Service.

25 01 '24

What Is the Transfer Value of a Pension

Hundreds of thousands of pension transfers take place each year, signalling a significant movement of retirement funds across different schemes. You’re likely considering the implications of such a decision on your own financial future.

Understanding the transfer value of your pension is a vital part of this process, and it’s not as straightforward as you might hope. This important sum is the amount your pension provider will offer you to move your current pension benefits to another plan. As you weigh the pros and cons, remember that this value is not merely a reflection of your total contributions but is influenced by a complex array of factors, including market conditions, underlying investments, and the rules of your existing pension scheme. Some of these factors may significantly impact the value of your pension if you transfer.

You must understand the nuances of transfer values and how they can affect your retirement strategy. This understanding will position you to make decisions with an informed mind; making the wrong decision without fully understanding your scheme could cost you thousands.

How is the transfer value and fund value different?

The transfer value of a pension is the sum you can relocate to a new scheme, often differing from the fund value, which represents the current worth of your savings without considering potential penalties or lost bonuses.

For defined contribution plans, the fund value is straightforward—it’s the total of your contributions plus any investment gains. However, the pension transfer value may factor in charges for leaving the scheme early.

In defined benefit schemes, the disparity is more pronounced. The CETV reflects an estimate of the present value of future benefits you’re giving up. It’s a complex calculation that considers your age, salary, scheme rules, and actuarial assumptions.

What is the cash equivalent transfer value?

As you consider the difference between transfer value and fund value, it’s also important to grasp the cash equivalent transfer value (CETV), if you have a defined benefit scheme. The CETV is the sum offered by your defined benefit pension scheme if you opt to transfer out, reflecting the value of your pension savings with another provider. This figure isn’t set in stone; it’s an estimate influenced by variables like age, internal scheme factors, gilt yields and life expectancy, among others.

When seeking to transfer a defined benefit scheme, you must engage with a Pension Transfer Specialist if your CETV is above £30,000. This is because defined benefit schemes are more complex than defined contribution schemes and, therefore, need more consideration.

Could my transfer value change after I decide to transfer?

When you commit to transferring your pension, it’s important to recognize that your transfer value may fluctuate due to market conditions and scheme rules before the completion of the transfer process.

As investment values change, so can the amount you’re entitled to move. Market value reduction could apply, particularly in with-profit funds, affecting the sum you receive.

It’s a financial reality that values change all the time, and these variations can occur right up to the point of transfer. To safeguard your interests, stay informed about the current market trends and understand how they might impact your pension’s transfer value.

Transfering a pension can often take weeks from the moment paperwork is submitted and markets can change a lot in this time.

If you wish to ‘lock in’ a transfer value, you could change your assets to cash before the transfer, which would avoid any market fluctuations.

How is a pension transfer value calculated?

You need to understand that calculating the transfer value of your pension depends on whether it’s a defined contribution scheme or a defined benefit scheme.

For defined contribution schemes, the transfer value is typically the current value of the funds you’ve accumulated.

In contrast, for defined benefit schemes, the calculation is more complex and can change dramatically over time. A recent example is CETV values, which during 2020-2021 were up to 40% higher than they are today (Feb 2024). This is due largely to gilt yields moving from historical lows of below 1% to over 5% in a matter of months.

Defined Contribution schemes

Calculating the transfer value of a defined contribution pension scheme involves assessing the current fund value and considering whether the fund has bonuses added.

Unlike a defined benefit scheme, your pension pot in a defined contribution plan reflects contributions made over time plus investment returns.

When you opt to transfer your pension, the transfer value is typically equivalent to the current value of your investments within the scheme.

There are some schemes however, such as with profit funds that include a bonus on top of the fund value. This bonus is not guaranteed in most circumstances and can be held back if market conditions aren’t favourable. Always check what the actual transfer value rather than just looking at the fund value.

Defined benefit schemes

Building on the understanding of defined contribution schemes, it’s essential to grasp how pension transfer values are calculated within defined benefit schemes. In these schemes, the process involves a more complex assessment of long-term financial promises rather than simply the sum of contributions and investment returns.

For final salary schemes, the final salary pension transfer value is an estimate of the present value of the guaranteed income for life you’re entitled to upon retirement. Actuaries use a defined benefit pension transfer calculator considering your age, expected retirement date, and life expectancy.

An enhanced transfer value may be offered to incentivize the transfer out of the scheme. However, it’s important to assess whether the transfer value adequately compensates for the security and benefits you’re giving up.

How long does it take to transfer a pension?

The duration of a pension transfer can vary, typically ranging from several weeks to a few months, depending on multiple factors such as the type of pension scheme and the responsiveness of the providers involved. When you ask for a transfer value, it’s important to understand that this figure is a snapshot based on the fund value at the time of the request, and it can fluctuate due to changing investment values.

To ensure a timely pension transfer, it’s advisable to be proactive in your communications with both the transferring and receiving pension providers. Delays can occur if there’s a lack of timely response or if additional information is required. There can be a lot of administration involved, and people often find it more efficient and less stressful to engage with a financial adviser.

Where is the best place to transfer a pension to

When considering the best destination for your pension transfer, it’s essential to weigh various factors, including the financial stability and performance record of the receiving scheme, to ensure alignment with your retirement goals and financial security.

Choosing a pension provider for your new pension requires careful scrutiny. The pension provider should offer a robust platform that aligns with your investment outlook and retirement timeline. It’s not merely about transferring to another pension scheme because you’ve heard it’s good; you must consider the long-term implications, such as fee structures, service levels, and fund options that match your risk tolerance.

Consulting with a pension advisor becomes indispensable here. They can dissect the nuances of your current pension, elucidating the complexities behind the transfer value and guiding you towards a decision that balances immediate financial benefits with sustained growth potential.

Help with transferring pensions with financial advice.

Navigating the complexities of pension transfers necessitates professional financial advice to ensure you maximise the transfer value while aligning with your retirement objectives. When considering a transfer, it’s not just about comparing the fund value with the transfer value but also understanding the implications of potential transfer incentives and the long-term impact on your retirement income.

I have been an independent financial adviser for over 20 years and have helped many people consolidate or move their pensions. The reasons for people wanting to move are many and varied from wanting better performance to lowering annual costs or reducing administration.

I have access to the whole pension market and can, therefore, recommend a suitable home for your pensions which aligns with your needs.

Book an appointment with my Pension Transfer Service.

17 01 '24

Can I retire at 55?

Can I Retire at 55

Like a seasoned marathon runner eyeing the finish line, you’ve paced yourself for a career that you hope can end at 55, well before the standard retirement age.

As you chart the course towards this milestone, it’s important to understand that retiring early isn’t merely a matter of wishful thinking but a strategic move that requires meticulous planning and a clear-eyed assessment of your financial landscape.

You must ask yourself if your pension pot is buoyant enough to keep you afloat for potentially 30 years or more of post-work life.

The decisions you make now about savings, investments, and expenditures could dictate the rhythm of your future years.

To navigate this terrain with confidence, you’ll need a map that outlines not only how to draw your pension at this early age but also how to optimize it for a life of sustained comfort.

The question remains: Do you have the right tools in your arsenal to retire at 55, and what might you still need to secure to make this vision a tangible one?

Let’s examine the strategies that could help you cross the finish line with your finances in winning form.

Key Takeaways

Accessing a pension at 55 is possible, but the age threshold will increase to 57 by 2028.
Drawing a pension earlier may have tax consequences and longevity risk, so exploring options like deferring pension or part-time work is important to avoid financial shortfalls.
Seeking professional advice can help. They have experience in planning early retirement and will also tell you if you have unrealistic goals.
It is critical to determine the income needed to sustain the desired lifestyle in retirement, considering factors like inflation’s impact on purchasing power and additional sources of income or investments.

Can I draw my pension at 55

Yes, you’re currently able to access your pension pot at 55, but this threshold is set to increase to 57 by 2028.

If you’re in a defined contribution pension, you can access just the tax-free cash if you wish or combine this with taking a taxable income. If you’re in a defined benefit scheme, you’re allowed to take your pension early, but you’ll suffer an early retirement penalty on your income, and you’ll have to take the income and tax-free cash at the same time.

To ensure you don’t face financial shortfalls later in life, you should explore all options, like deferring your pension or continuing part-time work.

When will it change to 57

Individuals planning to retire early should note that the age at which one can access pension pots is set to increase from 55 to 57 in 2028, necessitating adjustments to retirement strategies. Here’s what you need to consider:

Understanding the Shift

Birth Year	Minimum Access Age Before April 6, 2028	Minimum Access Age After April 6, 2028	Notes
On or before April 6, 1971	55	No change (55)	Not affected by new legislation
April 7, 1971 – April 5, 1973	55	57	Access window between 55th birthday and April 5, 2028.
After April 5, 1973	55	57	Delayed access by 2 years.

Can I take my pension earlier than 55

Whilst you have to adhere to the regulated minimum age to access your pension, there are a few exceptions.

You may qualify for taking your pension early through ill health. This is if you have less than a year to live and can be qualified by a medical professional.

If you joined a scheme that had a protected retirement age. Some schemes allowed for members to retire from the age of 50; these no longer exist, but if you are part of a scheme that offered it, you can still use this benefit.

Some people choose to access their pension before 55 with the understanding that they’ll be heavily penalised. The legislation states that a tax levy of 55% will be charged against those who access their pension before 55 so it’s only in very unique circumstances this should be considered.

Planning for retirement at 55 or 57

It’s not as simple as just deciding you want to retire early because you’ve had enough of work; you need to plan your path forward over the next 30+ years. You need to consider saving, expenditure needs, big events (such as moving house or university fees) and factor in inflation.

It’s also important to consider your partner’s pension provisions and the timing of your state pension to ensure a seamless transition into retirement.

How much Income will I need?

To ensure a comfortable retirement at 55 or 57, you’ll need to carefully calculate your income requirements, typically aiming for 70% of your pre-retirement earnings.

To establish if you have enough to retire, consider several key factors:

Retirement Income Needs
70% Rule: Aim for an income that’s 70% of your pre-retirement earnings.
Savings: Factor in how much of your savings you’re going to use to supplement income or whether your savings are going to provide growth/interest to supplement income
Lifestyle: You need to sensibly calculate what type of lifestyle you desire. Are you just after income to cover minimum costs, or do you want to be comfortable with two holidays a year and a new car every three years?

A useful way of determining this is to write down all your costs now and what these may look like if you retire tomorrow. This will show the change in required income. It’s a useful exercise and can often be humbling, but it manages expectations.

Will inflation impact my income?

Inflation invariably affects your retirement income, necessitating adjustments to ensure your pension pot maintains its purchasing power over time. You must account for the inflation impact on your income when crafting your retirement plan. If you’re pondering how much income you’ll need, remember that rising living costs can erode your savings faster than anticipated.

To afford to retire at 55 or 57, you’ll need to adjust your expectations and savings goals accordingly. Regular reviews of your retirement strategy help you stay ahead of the inflation curve, ensuring you can afford to retire comfortably.

The last few years have shown us the impact ignoring inflation might have. With annual growth in double digits, the pension income you forecast just might not go as far as you planned.

What other source of income/investments can I use?

Diversifying your income streams can significantly enhance your financial security when retiring at 55 or 57, allowing you to rely less on your pension and more on alternative investments and earnings. Here’s how you can broaden your financial foundation:

Private Pension & Investment Income:
Enroll in a private pension scheme for additional retirement savings.
Invest in stocks, bonds, or mutual funds for growth-oriented investment income.
Retirement Investment Strategy:
Develop a strategy that balances risk and return, accounting for your retirement timeline.
Consider annuities for a steady income stream in retirement.
Additional Income Sources:
Explore rental income from investment property.
Engage in part-time work or consultancy to supplement your pension.

Does my spouse/partner have a pension income?

Have you factored in your spouse’s or partner’s pension income as part of your retirement planning for an early departure from the workforce at 55? Understanding both your personal pension and your spouse/partner’s pension is paramount. Estimating the combined pension income, whether from workplace pensions or other pension schemes, can significantly affect your financial readiness for retirement at an earlier age.

Utilize pension calculators to gauge the total income you both could expect if you plan to retire at age 55. This step not only clarifies your joint retirement outlook but also aligns your savings efforts.

When will i get the state pension?

While considering you and your partner’s combined pension income for early retirement, it’s also essential to determine when you’ll be eligible to receive the state pension. The age at which you can get your state pension depends on your date of birth and National Insurance record.

The easiest way to do this is by checking on the government website. This will tell you when you’ll get the state pension and whether you’re up to date with your National Insurance contributions.

Cashflow planning

Understanding your forecasted income and outgoings and the effect inflation/growth will have on your pension/savings is a key part of planning.

Arthur Browns Wealth Management – What is cashflow planning? from CashCalc

You’ll need to assess your total income, including pensions and investments, to ensure it aligns with your anticipated costs.

If you’d like us to create a cash flow plan for you, log on here.

How can I use my investments to provide an income?

Strategically leveraging your investments to generate a consistent income stream is a critical component of cash flow planning for retirement at 55. To retire early and maintain your desired lifestyle, you’ll need to assess how much do I need and establish multiple income sources.

To diversify your portfolio, understand where your pension is invested and how much more you may need.
Dividends: Invest in dividend-paying stocks for regular income.
Interest: Allocate funds to bonds or savings accounts.
Rental Properties: Consider investment properties for ongoing cash flow.

Regularly reviewing and adjusting your investment strategy is essential to keep up with market conditions and your changing income needs. It’s wise to consult a financial advisor to optimize your pension pot to retire comfortably.

What are the retirement options at 55 or 57

If you wish to retire at 55 or 57, you’re faced with key decisions regarding annuities and pension drawdown options, and you must understand pension rules.

Annuities provide a guaranteed income for life, which can offer financial security, although they may limit access to your capital.

On the other hand, a pension drawdown allows for more flexibility and potential for growth, but it requires careful management to avoid depleting your fund prematurely.

Annuities

When considering retirement at 55, annuities offer a reliable income stream by converting your pension pot into regular payments. If you’re aiming for early retirement at these ages, understanding how annuities work is crucial, along with finding out how much state pension you’ll need. Here’s what you need to know:

Types of Annuities
Fixed: Provides consistent payments.
Indexed: Aims to adjust each year with inflation or a set rate.
Benefits
Stability: Guarantees income for life.
Simplicity: Easy to manage as you take your pension.
Considerations
Rates: Fluctuate, so timing matters.
Pot Size: Assess if you have a good pension pot at retirement to ensure sufficient income.
Health/Lifestyle: Annuities take into consideration your health and lifestyle habits, such as smoking.

Carefully evaluate if an annuity suits your financial situation and retirement goals.

Pension Drawdown

While annuities provide a stable income stream for early retirees, pension drawdown offers a flexible alternative, allowing you to take a tax-free lump sum at 55 while keeping the remainder invested.

However, to avoid the risk of running out of money, it’s important to work out how much you need in your pot to retire at 55 comfortably. Take into account your fixed costs and consider unexpected expenses like healthcare.

Remember, the pension freedom age will rise to 57 in 2028, so planning ahead is essential. It’s also vital to be mindful of market fluctuations, as your drawdown pot is subject to investment risks.

What else do I need to consider?

You’ll need to consider how inflation could erode your purchasing power over time, making it crucial to plan for increasing costs.

It’s also essential to understand how income tax will affect your withdrawals from your pension pot.

Lastly, realistically assess your and your spouse’s life expectancies to ensure your savings don’t fall short.

Inflation

Consider the pervasive effects of inflation on your retirement funds, as it can significantly diminish the buying power of your pension pot over the years. When you’re planning to retire at 55, it’s crucial to understand how inflation can challenge your financial security.

Inflation and Retirement Planning:
Evaluate how inflation will affect your need to retire with enough funds at the age of 55.
Assess the growth of your pension fund in real terms, accounting for inflation.
Strategize ways to save for retirement that consider the long-term impact of inflation.

Inflation can erode the value of your savings, making it essential to adopt an analytical approach to ensure you can maintain your desired lifestyle. Professional guidance can help you navigate these complexities, ensuring your retirement plan is robust against inflationary pressures.

Income Tax

Understanding the erosive effect of inflation on your retirement funds is important, but equally important is grasping how income tax will influence your available pension income. When you retire at 55, you’ll need to consider how your pension pot is taxed. Whether you’ve contributed to a workplace or personal pension scheme for 35 years, the amount you receive after taxes can significantly affect your ability to take early retirement.

If you stop work at 55 and don’t have any other taxable income, you can use your personal allowance of £12,570 before any tax is paid. This can be combined with taking tax-free cash to provide an annual income where you don’t pay tax. However, once you reach state pension age, your state pension income will use most of this personal allowance, so plan accordingly.

How long I and my spouse/partner might live

Estimating the potential duration of your retirement is essential, as living longer than expected could significantly impact the financial resources required for you and your spouse or partner. You’ll need to consider:

Life Expectancy Factors
Health conditions and lifestyle choices
Family history implications
The average life expectancy trends

By understanding these elements, you can better gauge how much you’ll need in your retirement fund. Aiming for a good pension pot is wise, especially since the average pension pot may not suffice if you retire at 55 and live longer than the norm.

Planning for longevity involves:

Financial Planning
Adjusting savings targets
Investment strategy refinement
Exploring additional income sources

Can I rely on the state if i run out of money

Relying solely on the state pension as a safety net if you deplete your retirement funds can leave you financially vulnerable, given its limitations and potential insufficiency to cover all living expenses. The state pension, while a cornerstone of retirement income for many, is designed to provide only a basic standard of living. If you’re aiming to retire at 55 without running into financial trouble later, you’ll need to plan beyond the basic pension in the UK.

Can I remortgage my house through an equity release?

While considering your retirement finances beyond the state pension, you might explore the option of remortgaging your home through equity release to enhance your financial flexibility. Equity release can be a viable way to supplement your pension pot, especially if you’re aiming to retire at 55 in the UK.

Here’s what you need to consider:

Types of Equity Release for Taking Early Retirement at 55:
Lifetime Mortgage: You borrow against your home’s value and retain ownership.
Home Reversion Plan: At the age of 55, you may sell a part of your home in exchange for a lump sum or regular payments while continuing to live there.

Eligibility and Amount:

Your age and property value largely determine how much you can release.
Typically, the older you’re and the more valuable your home, the more you can access.

Pros and Cons: of taking early retirement at the age of 55.

Provides financial flexibility without the need to move.
May reduce the value of your estate and affect means-tested benefits.

Before you remortgage your house, it’s important to weigh the long-term impact on your estate and explore if this aligns with your retirement goals. As always, seeking independent financial advice is recommended to understand the nuances and ensure it’s the right decision for your circumstances.

How will I manage my pension investments?

To effectively manage your pension investments for an early retirement at 55, it’s important to regularly review your portfolio and adjust your strategy to align with your evolving financial goals and market conditions.

Start by estimating your retirement income needs, factoring in the 70% rule—aim to replace this percentage of your pre-retirement income to maintain your lifestyle. Remember, your pension pot in the UK should ideally be well above the average to retire comfortably at 55.

A key aspect is optimizing your pension contributions. Maximise tax incentives and employer matches where possible to boost your savings. You’ll also want to choose the best pension funds that balance growth potential with risk management, considering both stock market performance and the magic of compound interest.

Moreover, be aware of the implications of inflation, income tax, and the state pension on your retirement income. Whether you opt for an annuity or a drawdown scheme, it’s essential to understand how each affects your pension pot’s longevity.

Seeking professional advice can provide personalized guidance to manage your pension investments efficiently. A financial adviser can help tailor your pension contribution strategy, ensuring you’re on a suitable path to meet your retirement goals and find out how much pension pot you need.

What can I do about saving more before I retire

If you’re aiming to retire at 55, it’s essential to assess and increase your savings now to ensure a comfortable retirement. Analyzing your financial landscape and making strategic adjustments can significantly improve your pension pot’s growth. Here are some steps to consider:

Utilize Tools and Advice
Use a Pension Calculator to gauge how much you need.
Seek professional advice to keep your pension strategy on track.
Understand income tax implications on your pension income.
Budgeting and Expenses
Differentiate between essential and non-essential spending in order to determine how much money you need to retire.
Calculate fixed costs and anticipate changes to regular expenses.
This will clarify how much you need to save to maintain your desired lifestyle.
Evolve your investment strategies based on an anticipated need in your pension pot.
Investigate how stock market trends and compound interest could boost your pension.
Select the best pension fund options to optimize your savings for a good pension pot at 55.
Start saving early; the longer you wait, the more you’ll need to contribute monthly.

Retire at 55 Checklist

Before you set sail into the sunset of retirement at 55, using your pension pot, ensure your financial compass is accurately calibrated by using the Unbiased Pension Calculator to estimate your retirement income needs.

Here’s your

Assess Your Savings
Have you saved enough to match the recommended pension pot?
Will your savings withstand the impact of income tax?
Is your current savings trajectory aligned with the lifestyle you desire?
Understand Your Pension Options
Have you accounted for how inflation could erode your pension’s value?
Are you aware of how the state pension will supplement your income?
Have you decided between an annuity or a drawdown scheme?
Plan for the Future
Have you considered potential changes in annuity rates and how they might affect you?
Are you prepared for uncertainties, such as healthcare costs or market volatility?
Do you have a strategy to adjust your plans if circumstances change?

Conclusion

In conclusion, retiring at 55 is achievable with meticulous planning and smart financial strategies, keeping in mind how much money you need.

You’ll need to assess your pension options, manage investments astutely, and possibly boost your savings while constantly asking yourself.

Consider all variables, from cash flow to tax benefits, and use available calculators for a precise retirement target.

Stay informed, make informed decisions, and your dream of an early, comfortable retirement can become your reality.

Don’t forget to utilize the retire-at-55 checklist to keep your plans on track.

Book an appointment to discuss your Pension.

09 11 '23

Should I consolidate my Pensions?

SHOULD I CONSOLIDATE MY PENSION

Consolidating multiple pensions into one plan can simplify management, reduce admin, save money, improve performance and provide a clearer financial picture.

However, the decision to consolidate can be overwhelming and confusing, requiring careful consideration of various factors.

This article will discuss the benefits, potential drawbacks, and key considerations involved in pension consolidation, giving you the tools to make informed decisions for your retirement.

Understanding Pension Consolidation

It’s extremely rare now that someone has a job for life and, indeed one pension. Various career moves across different companies can leave you with an array of pensions with different providers.

It’s often difficult to keep track of where they are and how they’re performing. Pension consolidation is a way of tidying up your retirement savings, giving you peace of mind you know what your money is doing.

Pension consolidation is essentially the process of combining all your pensions into one place. This allows for improved visibility, easier tracking of pension performance, and potential cost savings.

However, there are both pros and cons to consider. One of the key benefits of pension consolidation is the simplification of paperwork and reduction of charges.

By combining pensions, you interact with only one provider, saving you time and hassle. Pension consolidation also provides flexibility, which is particularly beneficial for those planning to retire soon.

On the downside, certain valuable guarantees might be lost in the process. These could include employer-matched contributions and final salary pensions that provide a guaranteed income for life.

Benefits of Pension Consolidation

Transitioning from understanding the concept of pension consolidation, we’ll now chat about the numerous benefits that this financial strategy can offer. The process of consolidating pensions involves transferring all your pensions into a single scheme, which can simplify your financial life.

Key benefits of pension consolidation include:

 Simplicity and Time Efficiency: Consolidating pensions can save time and paperwork by reducing the need to interact with multiple pension providers. You can manage your pension pot more efficiently, often online or on your phone, which you might not currently be able to do.

Financial Efficiency: Combining your pensions can potentially reduce charges, thus saving money.

Visibility and Flexibility: Consolidation provides a clear view of your pension performance and allows quick changes if needed.

Before deciding to consolidate your pensions, it’s crucial to consider the following:

 Potential Losses: Ensure you won’t lose any valuable guarantees or benefits in the pension transfer process.

 Cost-Benefit Analysis: Compare the costs and benefits of your current pensions and the consolidated scheme.

Why Consolidate Pensions

Consolidating pensions can provide a range of benefits, including cost savings on charges, enhanced investment performance, and increased visibility of your pension assets.

Moreover, it can streamline administration, simplifying the management of your retirement funds.

In the following discussion, we will comprehensively analyze each of these points, providing further understanding on the merits of pension consolidation.

 Save Money on Charges

While it is essential to consider several factors before consolidating your pensions, one significant advantage to consider is the potential to save substantial sums on charges. When you combine your pensions into one pot, you can:

Potentially reduce the costs. Some older pensions have excessive charges, and if you have several pensions, these additional costs may add up to thousands in overpayments.
Benefit from lower fees if your consolidated pension is invested in low-cost funds. Active and Passive funds have very different charges, the trend in recent years has been more passive investments, which have lower charges whilst competing on performance.

The goal is to maximise your retirement income, and every penny saved on charges helps.

 Investment performance

A significant factor to consider when contemplating pension consolidation is the potential improvement in investment performance. Some pension pots may offer a wider array of investment options, making it advantageous to consolidate and eliminate underperforming ones.

Older pension plans may be limited to a poorly managed fund or a restricted choice of funds, hindering optimal growth. By transferring pension funds into a single, better-performing pot, you can effectively manage your pension, ensuring it is aligned with the current investment environment.

However, it is important to balance potential gains against possible costs such as loss of employer-matched contributions or exit fees.

 Better visibility of your pensions

One significant advantage of pension consolidation is the enhanced visibility it offers over your retirement savings. Managing several different pension plans can be challenging. By combining pension savings into one, you get a clearer, unified view of your total retirement savings. This better visibility of your pensions allows for effective tracking and management.

Consolidation improves visibility:

Tracking and analyzing your pensions becomes easier.
It provides a holistic view of your retirement assets.

Combining pension pots reduces confusion:

It eliminates the need to deal with multiple providers.
You can check with pension providers in one place.

Determining if consolidation is right for you:

Consider the benefits and potential drawbacks.
Consult with a financial advisor to make an informed decision.

 Improved administration

In managing your retirement savings, you may find that consolidating your pensions offers improved administration. Merging pensions into a single pension scheme enables a more streamlined approach to pension administration. This centralization process reduces the complexity and paperwork involved in managing multiple existing pensions, thus saving you valuable time.

With a single, consolidated pension, making changes to your current pension plan becomes less cumbersome, eliminating the need to contact multiple providers.

Therefore, if you seek an efficient way to manage your retirement funds, consolidating your pensions could be a viable option.

Potential Drawbacks of Consolidation

Potential drawbacks of pension consolidation should be carefully considered, as this process can lead to loss of benefits entitlements and potentially incur additional costs. While consolidation can simplify administration by reducing the number of pensions to manage, it can also involve relinquishing certain advantages tied to individual pension plans.

By choosing to move pension pot funds into a consolidated account, you may:

Lose benefits from defined benefit pensions
These may include guaranteed income for life or entitlement to a larger lump sum.
Forfeit additional benefits
Some pension plans offer benefits like guaranteed annuity rates or employer-matched contributions. Consolidation might result in the loss of these.
Incur potential costs
Depending on the pension legislation, fees may apply during the consolidation process. Financial advice often also incurs costs.

In the end, the choice should deliver greater value and align with your long-term retirement goals.

Evaluating Pension Guarantees

Before you decide to consolidate your pensions, it’s important to carefully evaluate any pension guarantees that could be lost in the process. These guarantees, usually offered by your pension provider, can take forms such as a guaranteed annuity rate, guaranteed minimum pensions, or defined benefit pensions.

Guaranteed annuity rates, for instance, offer a secure, fixed income for life, often at a higher rate than what’s currently available on the open market. If you combine pensions, this beneficial rate could be lost, significantly affecting your retirement income. Given the current high interest and annuity rates, you should check if these are still advantageous.

Similarly, transferring out of a defined benefit pension could result in forfeiting a reliable, inflation-proof income for life. You will also need to seek specialist advice from a Pension Transfer Specialist for this type of pension.

Evaluating pension guarantees isn’t a task to be taken lightly. It involves an in-depth comparison of the benefits and costs associated with each pension. It also necessitates a comprehensive understanding of the conditions and terms set by your pension provider. Since these guarantees could potentially offer a more lucrative retirement income, it’s important you fully understand these benefits before moving your pension. Once you transfer your scheme, you can’t go back, so either check with your pension scheme provider or use a financial adviser.

Comparing Investment Costs and Returns of Pension Consolidation

Moving on from the evaluation of pension guarantees, our next focus is the comparison of investment costs and returns when considering pension consolidation. A critical factor to consider when consolidating different pension pots into a single pension is the potential change in investment costs and returns.

Costs related to Pension Consolidation
Annual fund management charges, which may vary between different pension providers.
Charges by the pension company to administer the consolidated pension.
Financial adviser charges that may be incurred during the consolidation process.
Potential exit charges and dealing charges when moving pensions.
Comparing Investment Returns
Compare the returns of your current pensions with expected returns after consolidation.
Consider the average returns for funds of similar risk levels. If you’re underperforming, you might be missing out on growth.
Making the Decision
A financial adviser can provide insightful guidance when deciding whether to combine your pensions.
Always weigh the potential benefits against any increased costs.

Deciding on Pension Consolidation

Often, the decision to consolidate pensions requires careful evaluation of both the financial implications and your individual retirement goals. Pension consolidation can prove beneficial in managing your old pension pots more effectively. An amalgamation of many pension providers into a single, manageable plan can simplify your retirement strategy.

However, it’s vital to ensure that this move aligns with your long-term financial goals. Consolidating workplace and personal pensions may streamline administration and provide a holistic view of your retirement savings. This might make it easier to plan for the future and reduce the overall costs associated with managing multiple pensions.

Nevertheless, it’s important to consider any potential losses before deciding to consolidate my pensions. Transferring out of certain schemes may result in losing valuable benefits or incurring hefty exit fees. Therefore, a thorough comparison of the costs, benefits, and investment performances of your current and potential new pensions is essential.

Finding Lost Workplace Pensions to Consolidate

A final thought when considering combining your pension pots is to consider a lost workplace pension scheme. Whether this be a defined benefit pension scheme or money purchase scheme, small periods of employment still often had pension contributions and the pension invested over time may be worth a good amount.

If you’ve moved house since you worked at the company, you may not be receiving scheme paperwork and may have forgotten the value of your pension benefits. The Pension Tracing Service can help. This is a government-backed initiative to reconnect the millions of pounds in lost pensions back to their owners. See also Moneyhelps guides on this subject.

Conclusion

In conclusion, pension consolidation can offer a simplified and potentially more cost-effective method of managing retirement savings.

However, it is important to consider potential drawbacks such as loss of valuable guarantees, increased investment costs, and possible exit fees.

A careful and thorough evaluation of individual circumstances and potential benefits and costs will enable a well-informed decision on whether pension consolidation is the most advantageous course of action.

21 09 '23

Should I Invest in Cash in My Pension in 2023?

Cash is King, was the old saying, and then it wasn’t if you were looking for a good return. But now the good times are back, and interest rates are at their highest for 14 years.

However, the options to take advantage of interest rates within pensions seem to be more difficult. In this article, we’ll explain how cash can be used as part of an overall investment strategy and how to access the products on offer.

Key Takeaways

Cash in pensions can offer a good risk-free return*
However, there may not be long to take advantage of current rates as inflation eases
Inflation risk is a concern with cash in pensions, and there may be potential for higher returns elsewhere.
Alternatively, investing in a money market fund can be a low-risk option with the potential for higher returns, but factors such fund management charges should be considered.

Cash Rates on Pension Accounts

As is common with mainstream banks, many pension providers have been sluggish in reflecting higher interest rates to the cash held on pension accounts.

Self-Invested Personal Pension (SIPP) accounts are typically not intended to store large cash sums over an extended period. Instead, they serve as temporary repositories for funds awaiting investment. They offer liquidity for facilitating charges and can also act as a transfer account for inbound and outbound transfers.

With the recent rise in the Bank of England base rate, a growing number of investors are now keenly aware that strategically holding cash could be a viable part of their overall investment portfolio. However, it’s worth noting that, given the historical returns, maintaining cash for lengthy periods is not generally recommended when compared to investing.

The following are the current interest rates various pension providers offer for cash stored in their accounts.

Rates as of 21/9/2023

Provider	Amount	Rates
AJ Bell	£0 – £10,000	3.20%
AJ Bell	Above £10,000	3.70%
Interactive Investor	On the first £10,000	2.75%
	£10,000.01 – £100,000	3.5%
	Above £100,000	4%
Hargreaves Lansdown	Above £100,000	4.2%
	£50,000 – £99,999.99	3.9%
	£10,000 – £49,999.99	3.65%
	£0 – £9,999.99	3.45%
Standard Life	Above £1	4.25%
Best Invest	Above £1	4.35%
Charles Stanley Direct	£0 – £24,999	1.00%
	£25,000 – £49,999	2.85%
	£50,000 – £99,999	3.05%
	Above £100,000	3.25%
Fidelity	Above £1	3.50%
Vanguard	Above £1	2.6%
Interactive Brokers	Above £100,000	4.72%

Typically, these accounts are not designed to store substantial sums of money and have been traditionally employed as intermediary accounts during the process of selling one investment to purchase another. Therefore, being cautious about the limits set by the Financial Services Compensation Scheme (FSCS) is crucial. Some providers might increase the number of protective layers by using multiple banks, but it’s always wise to thoroughly review the fine print. It’s worth noting that the FSCS compensation limit is set at £85,000.

Fixed Term Deposits

Another option for cash on pension accounts is to be fixed into a rate for a longer period. Much the same as you can fix money in a bank account for a longer period and attract a better interest rate through fixed-rate bonds, you can do the same in a pension. The product is known as a fixed-term deposit. The lack of understanding around this account probably stems from very few providers offering or promoting them.

Over the past decade, the rates on fixed-term deposits meant they didn’t offer any real return versus inflation. However, we are seeing an increased demand from both clients and new enquiries about how to access them.

The way they tend to work is a platform provider will offer access to a number of companies that offer these within a SIPP. Some platforms make it easier to access them by having a cash panel, whereas other providers offer them as an off-platform option, only if you ask.

Want to discuss SIPP cash rates?

Rates as of 21/9/2023

Provider			Term
	12 months	24 months	36 months	48 months	60 months
Cater Allen	5.05	5.2

Mansfield BS	3.79	4.1

Tandem	5.85	5.85	5.85

QIB	5.75	5.7	4.9

National Bank of Eygpt		5.21	4.86

ICICI Bank	5.5	5	4.5

Ahli United Bank	6.1

Brown Shipley	5.92

Gatehouse	5.9	5.75

Paragon	5.8	5.8

Alermore	5.69	5.58	5.17	4.79	4.6

Investec	5.69	5.74	5.74

The income or return from fixed term deposits is paid at the end of the term rather than monthly, and unlike fixed rate bonds which can be exited early to forfeit interest, these can’t. You really need to be sure you don’t need the amount for the chosen term.

Guaranteed Drawdown

There is another way of utilising interest rates while keeping your money in a personal environment. Sometimes referred to as guaranteed drawdown, the official name is a fixed-term annuity.

This is a halfway house between an annuity and drawdown. You can fix your pension for a term of between 3 and 25 years. Choose whether you want to take an income or not (and can specify the amount you want), and then an interest rate is applied to the fund.

Amount (£)	Maturity Value	Term (Years)	Effective Annual Interest
100000	128301	5	5.66%
100000	139600	7	5.65%
100000	159013	10	5.90%
100000	197717	15	6.51%
100000	253320	20	7.60%
100000	326336	25	9.05%

Lets chat about Guaranteed Drawdown

Money Market Fund

If the concept of locking money up for a period to enjoy higher interest rates doesn’t suit your access needs, there are money market funds. These offer a low-risk way to invest in short-term debt securities, certificates of deposit and commercial papers. The returns typically follow the Bank of England base rate with very few surprises. As they are funds, the investment can be accessed at any point or left alone indefinitely.

When compared to other investment styles, Money Market risk sits at the bottom.

Money Market Risk Profile

Some examples are:

Royal London Short Term Money Market -5.19%

Legal & General Cash Trust – 4.3%

Premier Miton UK Money Market – 5.77%

As of 21/9/2023

Frequently Asked Questions

What Other Investment Options Can I Consider for My Pension Apart From Cash?”

You could consider investing in stocks, bonds, or real estate. Diversifying your portfolio can help manage risk. Researching and understanding each option is essential before deciding where to allocate your pension funds.

How Will Inflation Affect Cash Investments in My Pension?”

Inflation can erode the value of your cash investments over time. If inflation rates exceed interest rates, you’re effectively losing money. It’s crucial to consider this when planning your pension investments.

Is It Advisable to Invest My Entire Pension in Cash?”

While putting all your eggs in the cash basket is tempting due to current high-interest rates, diversification is key. Don’t risk your nest egg on one strategy; the economic climate can change quickly.

08 08 '23

Pension Tax-Free Lump Sum To Be Scrapped

The Institute for Fiscal Studies, earlier in the year, proposed reforms to the pension system, including scrapping the 25% tax-free lump sum,

Need advice on your tax-free cash??

Key Points

The Institute for Fiscal Studies (IFS) proposes to scrap the 25 % tax-free lump sum to create a more equal subsidy for all private pensions.
The current tax subsidy for the tax-free lump sum mainly benefits high-income earners.
The IFS suggests capping the tax-free pension lump sum at 25% of the first £400,000 of pension wealth to ensure a fairer distribution of tax subsidies and provide equal after-tax value for everyone’s pension.

What is Pension Tax-Free Cash?

Pension tax-free cash is a lump sum taken from a pension fund that is exempt from taxation. The IFS proposes to scrap this in order to even out tax support for pension saving. Generally, up to 25 per cent of crystallised benefits can be taken as tax-free cash. This amount is linked to the value of the benefits being crystallised and is based on the available lifetime allowance.

Taking tax-free cash before age 75 usually means receiving up to 25% of the fund being crystallised. After age 75, it’s typically the lower of either the remaining unused fund or the remaining LTA. Defined benefit schemes have their own rules on providing more restricted levels of tax-free cash depending on scheme rules and commutation factors used by schemes.

The deferring of taking tax-free cash beyond age 75 results in its loss upon death. Beneficiaries will be subject to income taxes for any amounts received.

Will they Scrap Tax-Free Cash?

The IFS proposed scrapping the tax-free cash option for pensions, which currently allows individuals to take a quarter of their pension tax-free.

However, some are concerned that this could discourage employer contributions and reduce confidence in retirement savings planning.

As a Financial adviser, this question comes up each year from my clients who are worried about potentially losing earmarked money. Tax-free cash from pensions is an important part of cash-flow planning. Many have this earmarked for paying off debt such as a mortgage or to use to buy an investment property in retirement. People begin to plan how to use the tax-free cash from their pensions at least five years from their intended retirement. This is why scrapping it would be political suicide for any government that intends to bring this in.

The number of people this will affect across the board, from basic to high tax-payers, means few would encourage legislation for a total ban on tax-free cash. Simply it affects nearly everyone who has money in pensions.

There could be a scenario where in the future, the amount of tax-free cash from new pension contributions is reduced, but to limit access to legacy pension payments would be the death of any Chancellor who suggests it, in my opinion. Of course, this could happen, we have been surprised many a time on the budget day before, but a total scrapping of tax-free cash might be a step too far.

At what age can I access tax-free cash?

Generally, you can access tax-free cash from age 55, though in some cases, if you have protected tax-free cash with your scheme pension, you may be able to access this from age 50.

However, the age at which you can take tax-free cash is also set to change from 55 to 57 on 6 April 2028. Anyone born after 6 April 1973 could find they must wait an additional two years to access their pension.

Do I need to take all my tax-free cash at once?

No, you don’t need to take all your tax-free cash in one go. You can opt to withdraw it in smaller portions until 25% of your total pension pot has been crystallised. This allows you to manage your retirement savings more effectively and ensure that you are not taxed too heavily on a large lump sum withdrawal.

Furthermore, it provides flexibility as you can choose when and how much of the tax-free component to access.

What are the IFS Proposing

You can read the full report here, but here is a document summary.

Title: A Blueprint for a Better Tax Treatment of Pensions – Published by The Institute for Fiscal Studies in February 2023 –

Purpose: to help improve financial well-being for people on low-to-middle incomes –

Contents: – Executive summary: a brief overview of the report –

Introduction: explains the background and context of the report –

Background: provides information on private pensions in the UK and how the context has changed –

Current system: describes the UK pensions tax system and how much it costs –

Principles for the taxation of pensions: explains why the overall tax system matters –

Method for quantifying the impacts of reforms: describes how the report measures the effects of different reform options –

Comparison of the current system of pensions taxation with two benchmark tax systems: shows how the UK system compares to other countries –

Options for reform, including some that are recommended: proposes specific measures to improve the current system –

Conclusion: summarises the report’s findings and recommendations –

Empirical methods used to quantify the fiscal and distributional effects of the current UK pensions tax system and various reform options

Always seek help from a financial adviser if you don’t fully understand what options to take.

31 07 '23

Pension Advisory Service

A Pension Advisory Service can help you make educated decisions about your retirement plans. Pensions can be complex and something you might not deal with every day; well, our advisers do.

A Financial Conduct Authority-regulated adviser can assess your needs and recommend a suitable path for your retirement funds.

These professionals have the expertise to guide you in making sound financial decisions for your retirement, whether choosing the proper sort of pension, understanding the tax consequences, or performing continuous evaluations of your portfolio.

Why do I need a Pensions Adviser?

You need a Pension Adviser to ensure your pension funds, whether with one provider or many, are in the optimum place for your circumstances. A financial advisor can help you sort through the options and give personalised recommendations. They are qualified to advise you on estate planning, budgeting, investing, and transfer matters.

If your pension has some safeguarded benefits, such as a guaranteed income promise, and it’s above £30,000, it’s a regulatory requirement that you seek qualified advice for a specialist before making any decisions. Advisers can recommend suitable products and investment options aligning with retirement goals. It’s also important to consider the tax implications of different income withdrawal strategies to maximise returns and reduce tax.

Furthermore, professional guidance ensures that your pension remains on track with regular reviews. Staying informed about changing regulations and market conditions is crucial to avoid losing track of your portfolio or ending up paying more than you need to in management charges.

How Much Does It Cost For Pension Advice

Getting expert pension advice costs, as you pay for time and expert advice. How much will depend on the complexity of your plan and needs?

The most cost-effective way to pay for advice is usually from within the pension, as this can be very tax-efficient. Depending on the type of advice needed, a one-off consultation could be enough, or an ongoing retainer may be involved to access specialist support throughout life’s changes.

We will always state our charges after the initial assessment so that you are fully informed of any costs before you decide to proceed.

When choosing an adviser, look for someone with experience dealing with a wide range of pensions and investments who understands your circumstances, goals, and risk profile.

In short, getting expert pension advice doesn’t have to be expensive, but it pays off to research ahead of time to get value for money when seeking professional help with long-term planning objectives.

What is the Benefit of using a Pension Advisory Service?

If you work with a Pension Advisory Service you have piece of mind that your retirement savings are being looked after. A qualified pension adviser can help assess your current situation and create a suitable plan based on individual circumstances. They will recommend products and investment options that are appropriate for you, considering any changes in legislation or personal goals.

An experienced adviser will also be able to review existing pensions and investments, ensuring they remain suitable for your needs. They can identify areas where costs may be too high or investments may not perform optimally. Regular reviews are essential to keep track of progress towards retirement goals, and advice from an experienced adviser helps ensure this process remains manageable.

Using a pension advisory service offers additional benefits such as estate planning advice. This minimises inheritance tax liabilities while providing enough financial resources to meet long-term care expenses.

A good pension advisor understands that every client’s needs are different; therefore, they provide tailored advice so each individual receives the best information for their unique circumstances. Working with an independent professional gives clients unbiased advice from an expert who only has their best interests at heart – which is invaluable when making important decisions about one’s finances during retirement planning.

What Type of Pensions Can A Pension Advisor Help With?

A qualified financial planner can provide invaluable assistance in determining the best retirement decisions. They can help with pre-retirement advice, such as ensuring you are contributing enough to your pension pot, and retirement options, such as annuities, fixed-term annuities, and drawdown options. They can also determine if a transfer from a defined benefit pension would be advantageous.

Suppose you’re considering taking out some of your pension as a cash lump sum. An adviser will be able to recommend the most suitable and tax-efficient method of withdrawal. They can also advise on how much money is appropriate to invest in a pension scheme and explain how this could affect your income during retirement. Additionally, they can offer guidance on estate planning to ensure no surprises when leaving an inheritance.

What are ongoing pension Reviews?

Ongoing pension reviews are important for maximising the performance of your pension and providing you with a clear goal of a sustainable pension income. We usually recommend annual reviews or more frequent depending on your circumstances and investments.

Neglecting to review your pension can lead to disappointment, so it is best not to leave it too long between reviews.

A qualified financial advisor can help identify potential issues and provide guidance on necessary changes. They can also help you understand the cost of setting up a new pension plan and find the right providers to align with your goals.

Our advisors offer free consultations to discuss how they can assist you in effectively managing your retirement savings. With access to the entire pension market, our experts know to find suitable providers while considering any tax implications arising from their recommendations.

What Options Do I Have While I’m Working?

While you’re still working, you have several options to consider for planning your retirement and securing a comfortable future. One, often overlooked option is to consolidate all your pensions into one place. People tend to have more than one pension, often multiple ones from previous employers. It’s really important that those older pensions are reviewed to ensure the investments are still on track and that you aren’t overpaying in charges to run the plan.

A useful exercise many people undertake when reviewing older pensions is to consolidate them all under one roof. This allows for easier management and administration going forward.

Another option which should be regularly taken up is to review your pension value verses what you expect as an annual income in retirement. Some people fall into the trap of ignoring their pension until a few years before retirement and then discovering they haven’t saved enough. Reviewing your pensions with a financial adviser can help realign goals and set actions before it’s too late.

What Options do I have at retirement?

When you retire, you have a few options for accessing your pension.

An annuity provides a guaranteed income for life.
Drawdown gives you more flexibility and control over your finances.
Fixed-term annuities allow you to receive income for a set period.
Taking tax-free cash is an option if the value of your pension pot is small enough.

Regardless of your choice, seeking professional advice is important to ensure it suits your needs and goals.

Annuities

An annuity can provide peace of mind in retirement. It allows you to rest easy knowing you have a guaranteed income for life.

There are several types of annuities available:

Lifetime annuities: These guarantee an income for life and can cover essential spending. They may also include inflation protection.
Enhanced annuities: offer higher incomes based on medical conditions or certain occupations.
Purchased life annuities: These pay capital plus interest. The capital is tax-free, while the interest is taxable.

Pension Drawdown

Pension drawdown can make withdrawing from your pension pot easier. With an income drawdown, you can take an income while keeping your pension fund invested in the stock market. There is no limit on how much you can withdraw each year, but the fund needs to keep growing to replace withdrawals.

This option is best suited for those with a large fund or other income who are not ready to take all their pension immediately. However, it is important to consider the cost of income drawdown and ensure that it doesn’t outweigh any potential investment returns.

Fixed Term Annuity

A fixed-term annuity provides a guaranteed income for a set period. At the outset, it offers a guaranteed interest rate, which is applied to your pension and isn’t affected by stock markets.

Payment amount, annuity rates, length of term and your details determine income. This product offers flexibility in choosing frequency and term lengths from 3-25 years.

Single or joint options and add-ons, such as death benefits and inflation protection, are available.

Taking Tax-Free Cash

Taking tax-free cash from a pension fund is a well-used strategy for people who want to access funds immediately but maybe don’t want to fully retire and start taking a pension income.

Taking only the tax-free amount is popular for those needing immediate cash, but it has drawbacks, such as losing out on future potential investment growth and income benefits.

If you take the entire fund in one payment, 25% will be tax-free, while the rest will be subject to income tax at your marginal rate. Make sure that you consider your future income needs before making this decision, and seek professional advice if required.

Tax on my Pension

Regarding tax and pensions, there are two key points to consider: tax relief on pension inputs and taxes on withdrawals.

Before making any decisions, understand your current tax situation and how the rules may apply to you.

Tax relief is available on contributions made into a pension, up to certain limits, whilst income received from withdrawals will usually be subject to income tax.

Tax Relief on Pension Inputs

Tax relief on pension inputs is available up to £60,000 per year (2023/24). Contributions exceeding this amount may result in a tax charge. This includes employer contributions, which are included in the annual allowance.

Money purchases or tapered annual allowances may also impact the amount you can contribute and the tax charged.

Tax on Pension Withdrawals

Depending on your circumstances, withdrawing money from your pension can result in a tax liability. Generally, this is treated as income from employment and taxed like any other earned income you receive.

Your State Pension is taxable too and paid ‘gross’ without any deductions.

To minimise taxes, consider using tax-efficient strategies such as phasing withdrawals or structuring allowances to keep yourself out of higher tax bands. Seek advice to explore options that maximise returns and reduce liabilities.

Regularly review spending needs to manage retirement expenses effectively.

The Pensions Advisory Service

The Pensions Advisory Service provides a vital resource for individuals needing assistance with pension-related issues, empowering them to make informed decisions about their retirement. It is a non-profit organisation in the United Kingdom that receives funding from the Department of Work and Pensions and government grants. It offers free information, advice, and guidance on pensions, along with help resolving problems or complaints regarding pension schemes.

The organisation has recently merged with Money and Pensions Service and consolidated into MoneyHelper to provide a better consumer experience.

The services provided include assistance with state, company, or individual pension arrangements and a nationwide network of volunteer advisers. This includes experienced technical and administrative staff in London who can provide support. This consolidation aims to create a single source of information and guidance that all individuals can easily access.

The Pensions Advisory Service aims to ensure that people have access to free resources to make informed decisions about their future financial plans. Through its collaboration with other organisations such as the Money Advice Service, Pension Wise, government agencies, industry associations, and pension providers, it strives to raise awareness around pension-related issues while contributing to developing policies and regulations within the industry.

Overall, the Pensions Advisory Service provides an invaluable service enabling people to gain clarity on their financial situations to plan effectively for retirement – whether that be accessing advice on tax implications or understanding annuity options available. With its mission aiming at empowering individuals, it works towards providing much-needed support when dealing with such important life matters.

Conclusion

The Pension Advisory Service is a valuable resource for individuals looking to optimise their pension funds. Seeking advice from a pensions adviser is essential to maximise your retirement savings. While the cost of this service may vary, it is a worthwhile investment for its long-term benefits. Pension advisers know about all types of pensions and can provide ongoing reviews to ensure your retirement plans stay on track. During your working years, various options are available, such as increasing contributions or taking advantage of additional tax reliefs. Upon retirement, it becomes crucial to carefully consider how you will draw down your pension pot and ensure that any applicable taxes are paid correctly. By consulting with an experienced pensions adviser, you can have peace of mind knowing that your retirement finances are being managed effectively.

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