Pension planning – what are the options?

Continuing his series of articles on how to grow a heating and plumbing business, Martin Jones, MD of TradeHelp, offers a guide to pensions – the legal requirements and the various options available to ensure that you can enjoy a happy retirement.

With many misconceptions out there about what a pension is, let’s start off by defining it. A pension is a pot of cash which you and your employer pay into as a way of saving for retirement. After retirement you have the option to draw money freely from the pension pot or, alternatively, sell the cash to an insurance company in return for a regular income until death – this is called an annuity. So far, so simple. However, pension rules are constantly changing and can be complex and many people still do not know their rights.

Workplace pensions

This year (2018), the law changed to state that everyone over the age of 22 earning over £10,000 per year had to pay at least 3% of their monthly income into a pension fund and their employer had to match this by a minimum of 2%. Of course, you can opt to pay a higher percentage into your pension and some employers will offer more than the legally required 2%. These percentages are set to rise again in April 2019.

There is technically no limit to how much money that you can put into your pension, however there is a limit on tax relief.

Pension tax relief comes in two forms depending on whether you’re a basic-rate or higher-rate taxpayer. This is where tax brackets come in – if you pay the money into your pension yourself, or if your employer takes it from your pay packet, you a get 20% tax back from the Government as an additional deposit into your pension. If you are a higher-rate taxpayer you can claim an additional 20%, while top-rate taxpayers can claim an additional 25%. Or, if you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay packet. As of 2018/2019 those who have total pensions or savings of £1,030,000 won’t receive tax relief on further contributions.

State pensions

A state pension is an additional bonus on-top of your hard-earned working pension. Currently, those who are eligible for a basic state pension are: men born before 6 April 1951, and women born before 6 April 1953. The full State Pension (as of April 2018) is £164.35 per week.

There are ways you can increase your State Pension up to or above the full amount, such as 30 years of payment of national insurance contributions or deferring or delaying – the basic State Pension increases by 1% for every five weeks you defer. What’s more, your marital status and inheritance can have an effect on the amount of money that you receive.

Aside from these two types of pension, there are many more – they come in all shapes and sizes! Here’s a simplified breakdown:

Other pensions

Trust-based pensions – this is when a board of trustees manage investments on your behalf – you pay into the pot and it’s invested. The trust fund is kept at an arm’s length principle, separate from the company. What’s more it allows benefits to be handed to your partner or other dependant family members.

Self-invested personal pensions (Sipps) – these are kind of DIY pensions, allowing you to choose your investment. Investors prepared to do the legwork themselves can run a Sipp, if they use the right provider. These are a little more complicated and it’s worth doing your research first.

Group personal pensions – this type of pension is between you and a third party insurance provider. The provider isn’t required to act in your best interests. The potential problem with this is that your employer chooses the provider, but these arrangements usually offer you a choice of investments.

Stakeholder pensions – these are similar to workplace pensions, but have low and flexible minimum contributions, capped charges and a default investment choice.

Nest egg

So, who actually holds on to your pension money? For working pensions, for the most part your employer will allocate a company to host the money. What’s more, the Government has set up its own scheme, called the National Employment Savings Trust (Nest), which many employers, who have yet to start a workplace plan, are expected to join.

Pensions are complicated, of course, and this article has simply scratched the surface. However, having a pension is essential – we are living longer and it is necessary to save for our hard-earned retirement.

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