Pensions, as Important as Your Family Home, but Less Understood
Indeed, pensions are as important as your family home alas they are often far less understood. Along with your house, your pension might well be your greatest asset. Many people are familiar with the concepts of mortgages and know by when they will pay off their mortgage. However, not so many are familiar with how pensions work. Fewer still are aware of the options available to them when it comes to retirement planning.
Importantly, a pension is not simply a product for the future. The choices you make now regarding contributions can affect your current tax liability: primarily through tax relief on contributions. They can even be used as a highly tax-efficient method of saving for children’s futures.
What Types of Pensions Are There?
Defined Contribution Pension
A defined contribution pension plan is effectively a pot that you and possibly your employer pay into. The aim is for the pot to grow through investment in order to provide you an income in retirement. The amount of income that you receive from a defined contribution plan will depend on the value of the pot when you reach retirement. It will also depend on the retirement option that you choose to utilise.
The money that you contribute into a defined contribution pension plan is usually tax free as long as you contribute less than £40,000 per year. However, the limit can be lower than £40,000 depending on your income. The government also adds tax relief to your pension contributions. The amount of tax relief you receive is based on the highest rate of income tax you pay.
There are many types of defined contribution pension plans. For example, workplace pension, personal pension, self-invested personal pension (SIPP) and small self-administered pension schemes (SSAS).
You can use a defined contribution pension plan to achieve maximum income tax efficiency. They can also be used for estate planning as the funds held will fall outside of your estate for inheritance tax purposes.
At Henson Crisp we can advise you on which type of pension is suitable to your circumstances and financial needs.
Defined Benefit Pension
A defined benefit pension is sometimes known as a final salary pension. This is an employer based pension scheme which will provide you with a guaranteed income throughout retirement. Typically, the income would be inflation proofed and also include a spouse’s pension which would be payable to your spouse in the event of your death.
The amount that you could expect to receive from your defined benefit pension plan in retirement will depend on various factors. These include the number of years you’ve been a member of the scheme and your pensionable earnings. Additionally, the scheme rules would usually outline how the retirement benefits are to be calculated.
You can usually transfer your benefits from a defined benefit pension to a defined contribution pension plan. However, this is unlikely to be suitable for most people. By transferring you would be giving up valuable benefits and might find yourself worse off.
We Can Help You Understand Your Pension
Henson Crisp offer you a comprehensive review to help you understand your pension. We will review your current pension provisions to make sure you are on track to meet your required income goal throughout retirement. We will also provide you with recommendations as to where we think your pensions should be held, invested and the amount of contributions you would need to make to meet your income needs in retirement. Going forward, we would then continue to provide ongoing advice and hold regular meetings to discuss any changes.
Our initial consultation is a no-obligation meeting at our expense and with no charge to you. If you choose to go ahead with our advice, we will charge you a clear fixed fee for the work that we undertake on your behalf. Our initial and ongoing fees will be disclosed to you before we undertake any work.
Frequency Asked Questions
This will be dependent on the level of savings you have for retirement and the amount of money you estimate you will need for a comfortable retirement. We can provide a comprehensive review of your income and outgoings and use this to calculate how much you will need in retirement.
This will vary from person to person depending on what you intend to do in retirement. If you intend to spend funds on things such as cruises and new cars then you will need a higher level of retirement savings.
With our comprehensive review service, we will analyse your pension savings to see whether they are on target to meet your retirement needs.
This varies depending on what type of pension you have.
Typically, contributions will purchase units in a pension fund. The value of these units will fluctuate depending on the value of the fund.
Most pensions can be transferred to another provider, however there are some exceptions to this. There may also be charges for transferring.
We can analyse your existing Defined Contribution pensions to see if a pension transfer would be beneficial. We do not advise on Defined Benefit transfers but can refer you to a third-party if you want to investigate this option.