The Professionals Choice


New rules cutting early exit fees on pensions.

Over-55s wishing to cash in their workplace or personal pension pots early will pay a maximum of 1% in charges from 2017.

What has changed?
Most pensions don’t have early exit fees. However, for personal pensions that do, they are now capped at 1% for those 55 or older. Some pension providers have even removed the fees altogether.

These fees could apply if you want to access your money or transfer to another provider before the retirement date on your policy, which is typically set at age 65.

What does this mean for me?
If you’re affected, you could see a dramatic reduction in the early exit charge applied to your policy.
This could help if you want to choose a pension with wider investment choice, better service and flexible retirement options. Switching provider could also make your pension easier to manage, particularly if your current policy can’t be managed online or the online account isn’t clear.

If you feel you could benefit from transferring, it has never been easier. But before you transfer, ensure you won’t lose valuable guarantees or benefits. You should check what exit fees apply and ensure they aren’t excessive.

Should I keep paying into my pension when I retire?
As the majority of people in the UK fall under the umbrella of tax payers, we see our hard earned money handed to the government in the form of taxation, so when the opportunity comes to get some of it handed back, why not use it!

You might think because you’ve started drawing a retirement income, you’re unable to add more money to your pension pot. However, being a UK resident under age 75, you can contribute to a pension and receive tax relief from the government. This is still the case even if you’re no longer working. In fact, this is probably one of the most tax efficient investments you can make.

The benefits of a having a pension
 When you pay money into your pension, the government will automatically give you 20% of its value. If you pay 40% or 45% tax you can claim back even more through your tax return. Every UK resident under 75 is entitled to this government monetary hand out. If your spouse or partner is under 75, you could do the same for them too.

If you’re over 55 (57 from 2028), you can access your pension when you like. 25% will usually be tax free and the rest taxed as income. Thanks largely to George Osborne introducing the pension freedoms in 2015. By placing your money into a pension, anything left when you die can be passed on to your loved ones, tax free in many cases, outside of your estate and not normally subject to inheritance tax. A pension can be a great way to pass wealth to future generations.

How much can I pay into a pension?
If you have finished working and don’t have any earnings, you can pay £3,600 each tax year into your pension. This includes SIPPs (Self Invested Personal Pension). You pay just £2,880 and the government automatically adds £720 to bring the total to £3,600. If you retire at 60 and save the full amount for 15 years up to your 75th birthday, you would receive £10,800 from the government (tax rules can change).

Still working but haven’t accessed your pension

The rules are: you can invest up to 100% of your earnings into a pension or £40,000 (whichever is the lower amount) each tax year. There can be restrictions if your ‘adjusted income’ is over £150,000.

Still working but have accessed your pension

Contributions made into your most recent money purchase (e.g. personal and self invested) pension schemes, will be limited to £4,000 once you have flexibly accessed your pension. You should also ensure the amount you contribute does not exceed your earnings.

Flexibly accessing benefits includes taking an uncrystallised funds pension lump sum (UFPLS), taking an income payment from a drawdown account set up after 5 April 2015 and being in flexible drawdown prior to 6 April 2015.

Contributions on behalf of someone else

This depends on their circumstances and whether they have earnings. The normal pension contribution limits still apply. Saving to a pension on behalf of someone else doesn’t affect how much you can save to your own pension, and your own age and tax status will not matter either. As with any gift, you should be clear how this might be treated under inheritance tax rules.

How do I start a pension?

You can open a SIPP with the help of your professional financial adviser. You can make a payment from just £25 a month with some pension providers and stop or change the amount whenever you like, usually without charge. You can also make one-off
contributions into your pension, usually without charge.

Pension and tax rules can change. The value of any benefits will depend on your circumstances. The value of investments can
also fall as well as rise so you may get back less than you invest. This article and factsheet are not personal advice. If you are at all unsure of the suitability of an investment for you circumstances please contact us for advice.

Draw down tips for tax planning
With pension income being taxable, care should be taken when making withdrawals to limit the tax charge.

Draw down allows you to remain in control of your pension and retirement income, choosing where to invest your money and how much draw down income to take. Of course you should also consider how much you withdraw and when, because excessive withdrawals will diminish your fund value and you could be hit with an unexpected tax charge.

No one likes unplanned tax surprises, so here we offer three tips to help avoid paying more tax than is necessary.

No 1 – Consider drawing your full tax-free cash entitlement
When you move any part of your money into draw down, you can usually opt to take up to 25% of the value as a tax-free lump sum. You will be asked to decide how much tax-free cash you want to take at the beginning of the process.
If you choose to take less than the maximum tax-free cash sum or none of it, you can’t change your mind later on. Once your
instruction has been finalised it cannot usually be reversed. Any income you take after this point is taxable, unlike a UFPLS (Uncrystallised Funds Pension Lump Sum), where each segment allows a 25% tax free cash lump sum with the remainder being taxed.

Even if you don’t need the whole lump sum now, you might consider using the tax-free cash to supplement other income, or provide a cash reserve. Should you decide to take income later, you can do so from this reserve without having to sell investments at a time when the market is low. Selling after markets have fallen will significantly impair your portfolio’s ability
to recover any loss.

No 2 – Spread withdrawals over different tax years
Pension income is added to your other income in the tax year it is received and taxed as a total income. It is therefore likely that any large or irregular withdrawals could push you into a higher tax band.

There is no rule that states you have to take a pension in one lump, you can phase in your retirement to take the tax-free amount and income in stages. You may consider spreading withdrawals over more than one tax year to make the most of tax allowances.

No 3 – Tax efficient bequeathing
As part of the recent Conservative government pension shake up, pensions now offer more flexibility than ever before especially to your beneficiaries and can be passed on far more tax efficiently: any remaining pension can usually be taken as a lump sum or paid as income to whomever you choose, free of tax in some cases.

If you die before the age of 75 there is usually no income tax paid on the withdrawals made by your beneficiaries. If you die after the age of 75 then the withdrawals are taxed as income.

Pensions are typically exempt from inheritance tax, so it may make sense to use other savings, such as ISAs and investments
outside of a pension, before you withdraw money from a pension.

We strongly recommend you understand all of your pension decisions and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.

The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options face-to face, online or over the phone.

Enhanced annuities

When it comes to life insurance products you might be used to seeing premiums going up after confirming your health details.
With annuities, a retirement option offered by insurance companies, the same principle applies but works in your favour.

Confirming health and lifestyle information could mean you end up receiving a higher annual income.
An annuity allows you to exchange some or all of your pension for a guaranteed taxable income for life from age 55 (57 from 2028). Up to 25% of the amount used for the annuity can usually be taken as a tax-free lump sum at the outset. Over £1bn was invested in annuities in the third quarter of 2016 and they are still one of the most popular options chosen at retirement.

Annuities that offer a higher income based on health and lifestyle information are known as enhanced annuities.

What are the qualifying factors?
You don’t have to be seriously ill to qualify as over 1,500 medical and lifestyle conditions are taken into account by annuity providers. In fact, the majority of annuity clients qualify for a higher rate.

Some qualifying factors have been as simply as confirming your height, weight and alcohol intake. Some other common qualifying factors include:
•  Smoking
•  Taking prescribed medication
•  High blood pressure
•  High cholesterol
•  Diabetes
•  Heart disease, heart attack or angina
•  Stroke
•  Cancer

How much more income is available?
The enhancements can be significant and, because annuities are guaranteed to pay for life, it could mean thousands of pounds of additional income over your lifetime.
The chart opposite shows how different conditions can boost your income.
The enhancement you receive will be higher or lower than this depending on your circumstances.

Do I qualify?
Finding out if you qualify is easy. There’s no need to have a medical exam to obtain quotes, you just need to confirm details about your health and lifestyle. To get the best rate, it’s important to shop around. The most competitive provider will change frequently and your current pension provider is unlikely to offer competitive enhanced rates. Don’t worry, you don’t have to
contact each provider separately; your professional financial adviser will shop around for you.

Make sure you provide full health and lifestyle details before you apply so you don’t miss out on additional income (include your spouse or partner’s health and lifestyle details when you get joint life quotes, as this could also enhance your rate).

Once set up, an annuity cannot usually be changed or cancelled. It is important to consider all your options carefully, including
whether you want an income to continue to a spouse or partner, or how income might be affected by inflation in future. Annuity rates change regularly and may go up or down in the future. Quotes are guaranteed for a limited time only. You should check you do not have any guaranteed annuity rates or other guarantees with your current provider before applying.

What help is available?
What you do with your pension is an important decision. Therefore, we strongly recommend you understand your choices and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.

The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options face-to face, online or over the phone.

Have you forgotten your pension?
With employment no longer a job for life, many people now experience multiple positions with different employers. Therefore,
it is easy to understand why many people have at least one pension pot, although on average most people think they have forgotten about two and some have forgotten three or more.

According to government figures, there is an estimated £400 million in unclaimed pension savings. At the same time, almost 60% of UK adults are very concerned about not having enough money to see them through in retirement.

Locating pension statements
Being a present or past member of a pension scheme means you should, by right, receive a statement without fail each year. These statements include an estimate of the retirement income that the pension pot could generate when you reach retirement. If by chance you are no longer receiving these statements, perhaps because you have moved and changed address, then you need to track down these pensions as soon as possible. There are three bodies which you should contact:
the pension provider, your former employer (if it was a workplace pension), or the Pension Tracing Service.

Boost your pension cash
Tracking down a lost pension can provide a huge boost to retirement income, but those who delay or don’t put enough efforts in doing so, could receive a smaller amount than expected. A forgotten pension may have been subject to charges and not invested in the best way suited to the policyholder; these issues have the effect of making the pension pot worth less than it would have been if it had been actively managed. It is thought that many savers never review their retirement savings, with a small minority of those with a pension reviewing it less than once every five years.

Fund management
Since the introduction of the Pensions Act 2008, every employer in the UK must place qualifying staff into a pension and contribute to it, this is called ‘automatic enrolment’. Since the introduction of automatic enrolment, the number of pension savers who are unaware of the fund, their fund choices or have never reviewed it is believed to have grown.
Personal pension management is very important as is being aware of the potential consequences of having a number of different pension pots with small amounts of money in each. It’s likely that there will still be management charges taken out of the pots for their annual management and administration costs, such charges can have implications if you are no longer making contributions into the forgotten pension.

Don’t forget this is your money and making it work now will improve your chances of a rewarding retirement.

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