What are the different types of pension plans?
There are two broad types of plans: defined benefit and defined contribution plans. A defined benefit plan is This is a plan which an employer may provide promising a set income on retirement. This is determined by a formula based on earning history, years of service and age amongst other criteria. It does not depend on investment performance. We do not give advice on these types of plans but can give you information on how your plan works and build any subsequent advice around these plans.
A defined contribution plan is where contributions into a pension plan. If employed the employer, employee, or a mixture of both can pay into the plan, however anyone can pay into a defined contribution pension plan (within certain limits). In its most simple form, a defined contribution pension is simply a savings plan. It is designed to help people to save for income later in their lives.
Once money has been paid into the plan, either as a lump sum or on a regular contribution basis, it can be invested in various ways depending on the type of pension. It is important to make sure that the money is invested in line with your attitude to investment risk, as the value of investments can go down as well as up and is managed appropriately given your objectives such as how much income you may need in retirement and how long you have until you intend to take income from the plan.
As you can see there is a lot to consider when using pensions, our financial advisers are experts in pension panning and will help you get your plans on track to achieve financial freedom.
Regardless of the type of pension that is chosen, it is important to consider financial planning, investments, and inheritance tax planning when setting up a pension. Financial planning involves looking at an individual’s overall financial situation and setting goals for retirement. This can include looking at current and future expenses, as well as other sources of income such as social security.
Investments are also an important part of pension planning. The investments that are made with pension funds can have a significant impact on the amount of income that a retiree will receive. It is important to consider factors such as risk tolerance, diversification, and fees when choosing investments for a pension plan.
Finally, inheritance tax planning is also an important consideration when setting up a pension. Inheritance tax is a tax that is paid on the value of an individual’s estate when they die. By planning ahead, individuals can reduce the amount of inheritance tax that their estate will have to pay, which can help to preserve more of their assets for their heirs.
What are the benefits of a Pension?
The government encourages people to save for their income later in life and therefore there are various tax advantages and incentives to paying into this savings plan.
A benefit of investing into a pension is tax relief. This is essentially free money, paid on top of your contribution by the government. The tax relief you receive (up to certain limits) is based on you level of income tax you pay:
20% for basic rate taxpayers (or nil taxpayers)
40% for higher rate taxpayers
45% for additional rate taxpayers
As an example, if you’re a basic rate taxpayer if you put £100 into your pension, you’ll get £25 tax relief so £125 will actually be paid into your plan.
Please note the rates for Scotland differ and tax treatment will depend on individual circumstances. tax rules could change in the future and not all areas of Estate Planning or Tax Planning are regulated by the Financial Conduct Authority.
What are the restrictions on withdrawing money?
There are also restrictions as to when money can be removed, this is to encourage people to use their pension funds later in life. For most people this will mean they will be able to access their plan from age 55 under current regulations however this is shortly to increase to age 57. Usually 25% of the fund can be taken as a tax-free lump sum, income is generally taxed at usual income tax rates.
How can you receive a Pension?
After the age of 55 (shortly to become 57) you can receive income in different ways. This could be via:
Using the entire fund to purchase an “annuity” which is a product which will pay you a guaranteed income for the rest of your life
Using part of the fund to purchase an annuity and leave the rest invested
Take regular income from your pension plan, keeping the pension invested to provide this income
Take periodic lump sums from your pension
Cash in your entire pension fund in one go
A mixture of all the above
Having a pension gives you great flexibility to achieve your lifetime plans. As your independent pension advisors, we can work in partnership with you through our ongoing advice service, not only to keep the pension plan on track whilst you are saving for your retirement, but also to manage and advise on your income during retirement.
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