5 things you need to know about private pensions
You work hard to enjoy your current lifestyle but are you doing enough to ensure that you continue to enjoy it in retirement? Many of us live for today, but saving into a private pension plan can help you retire sooner rather than later.
1. The boost of a private pension
Private pensions, also known as personal pensions, are a tax-efficient way of saving money during your working life so that you have an income when you want to retire. With proper planning, your private pension will allow you to enjoy the lifestyle you want in later years.
2. What about the State pension?
The full state pension – now in a simplified version introduced in 2016 – is currently just £8,546.20 per year (or £164.35 a week). That is considerably less than most people’s salary or wages. But to qualify for the full state pension you must have paid National Insurance contributions for at least 35 years. If you’ve paid less than ten years’ worth of contributions you may not be eligible at all. You also have to wait longer before you can get access to it. Under the new rules, both men and women can only claim their state pensions from the age of 65. But that age limit is set to increase. From 2020, the state pension age will be 66 and from 2028 it will be 67. The state pension is unlikely to provide a substantial income in retirement. That’s where a private pension can make a big difference.
3. Developing your pension portfolio
Pensions can appear confusing, but seeking financial advice will allow you to be guided through the maze. The term ‘private pension’ covers both workplace pensions (also known as occupational or company schemes), arranged by your employer, and personal pensions, which you manage yourself. There is no restriction on how many pensions you can have, and some people will have both. A personal pension operates in a similar way to a workplace scheme, except that you make the contributions yourself into a plan of your choosing. You can make monthly payments, one-off payments or a combination of the two.
4. Your pension timeline
To take advantage of your available allowances, typically you should pay as much as you can into your pension, as early as you can and for as long as you can. This will allow you to take advantage of any compounding effects and long term rises in the market. You should also consider increasing your payments in line with your earnings to help make maximum use of your annual and lifetime allowances.
5. How can I make the most of my pension when I retire?
In 2015, the Chancellor introduced pension freedoms. This allowed people in defined contribution schemes to decide for themselves what to do with their pension pot. Anyone over the age of 55 can now take their pension money in the way that they want, when they want. Although some defined contribution schemes may not offer all options and a pension transfer may be required, so best to check with a professional adviser. You could take the entire amount in one go. The first 25% is tax-free but the balance is taxable. Alternatively, you could take 25% in one tax-free lump sum and then invest the rest in a flexible income drawdown product, giving it the chance to grow, while allowing you to receive a regular income and even dip into the savings with larger withdrawals as you need to. You could opt to take your cash in chunks until there is none left, with every withdrawal attracting 25% tax-free and the rest taxed at your current rate. On most schemes there is also no requirement to cash in your pension plan when you reach the retirement age you agreed with your pension provider, although if there is you may need to consider a pension transfer. Delaying drawing your pension has the advantage of potentially giving you more money over a shorter retirement period, and there is no tax to pay while the savings remain in your pot.
Pension plans are as individual as the people who invest in them. There is no one-size-fits-all, tax-efficient solution for private pensions. Instead they should be tailored to match your particular needs and aspirations. By seeking financial advice it will allow to get access to experience and knowledge to help guide you on the best options for you and your family. There are different types of pension scheme.
- Defined Contribution (DC) – also known as a money purchase scheme. This is the most common type of pension today and basically works like a tax-efficient, long-term savings scheme. The idea is to build up your savings over your working life. When you come to retire, as early as 55 years old, you can take up to 25% of the total pot out as a tax-free lump sum. The remaining amount can be left to build up further until you decide what to do depending on your scheme.
- Stakeholder Pension
This is a simplified form of the defined contribution scheme, which allows you to pay low minimum contributions and is very flexible. Charges are capped and providers offer default, off-the-peg investment strategies if you prefer not to think too much about that.
- Self-invested Personal Pension (SIPP) A SIPP is a specialist type of personal pension that allows you to invest in a wider range of assets than a standard personal pension, which is limited to a restricted list of funds. A SIPP can hold individual shares, commercial property and exchange traded funds, for example. As the name suggests, it is self-invested, meaning that you have responsibility for managing your own investment portfolio. This DIY approach can be liberating but also requires considerable confidence and expertise.
- Defined Benefit (DC) Scheme A few lucky people are still on Defined Benefit pensions (also known as Final Salary schemes). This type of workplace pension was quite common until the 1990s when the risks of guaranteeing a generous, index-linked fixed pension income for life became too great. Nearly all are now closed to new members. The amount of pension you receive is calculated as a percentage of your salary typically in the last year of employment, usually your highest earning year though some schemes use other calculations such as your average career earnings.
To speak to an adviser about pensions and your retirement plan, we offer a Personal Financial Advice Service. The service can also help you with retirement planning, building an investment plan, estate planning and more. The service is for those with at least £100,000 sole annual income, or at least £100,000 in savings, investments or personal pensions.
Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise.
Tax treatment depends on individual circumstances and may be subject to change in the future.
Important Legal Information
Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales, no. 2065. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 119278.