Fintuity’s Guide to Pensions

Pensions planning is a major consideration for many of us as we move toward retirement age and there can be many pitfalls – this extended article will assess every facet of pensions planning and help give you a helpful overview as to what options are open to you.

We would always recommend that you take expert advice and we can assist you in a number of ways. Whilst pensions for many are a far off concern, having the right scheme in place can pay serious dividends by the time you approach the end of your working life.

What is a Pensions Scheme?

Simply put, a pensions scheme is a type of savings plan to set aside funds for later in life. Often with a favourable tax regime, pensions provide financial stability for millions in later life.

There are several types of pension schemes. Some may be run by your employer, others you can set up by yourself. And saving into one scheme doesn’t mean you can’t save into another or use other tax-efficient savings plans like ISAs.

When retirement age comes, there will be several options available to you. These may include being able to take a tax-free cash sum and the added security of being able to receive a regular income.

What Type of Pensions are Available?

Aside from your State Pension, you have a number of private pension schemes available. Put simply, there are five main types of  private pension arrangements in the UK that can be grouped into the categories:

• Occupational Pension Schemes (OPS) – These are schemes that are workplace related.
• Additional Voluntary Contribution Pension Schemes – There may be a limit in place for your existing OPS setup – this gives you the option to add additional voluntary contributions to top up your OPS.
• Personal Pensions – Personal pensions are an entirely voluntary pensions programme that allows you to put in as much or as little as you choose. This could be a good alternative for those that are self employed or for those who wish to diversify their pensions portfolio.
• Buyout Policies – Known as the s32, Buyout Policy Pensions are usually defined as having a contract between yourself and the provider directly.  The provider is usually an insurance company and were used by workers to switch a pension built up in a workplace to an individual policy upon leaving that particular employer.
• Retirement Annuity Contracts (RACs) – Retirement Annuities Contracts (RACs) are a type of pension scheme that were available to the self-employed, or workers not offered a workplace pension before July 1988.

Introducing The State Pension

The State Pension is a regular pension payment from the government that most people can claim for when they reach State Pension age. Not everyone however will receive the same amount and how much you get depends on your National Insurance payment record.

The new State Pension provision changed on the 6 April 2016 for those who reached the State Pension age from then onwards. In essence this is men born on or after the 6 April 1951 and women born on or after 6 April 1953.

Prompting the new change, the old system was inherently complicated, which made it difficult to assess how much the recipient would receive until they were close to the actual State Pension age. With the new State Pension however, retirement planning is easier as there are clearer and easier to access guidelines.

For many the State Pension is only one part of their retirement income and is often rolled into a wider employer or personal pension portfolio.

How the State Pension Works

The new State Pension is based on people’s National Insurance (NI) records that have been paid over their lifetime.

For those with no National Insurance records or contributions prior to April 2016, they will need 35 qualifying years of NI payments in order to receive the full amount of the new State Pension upon State Pension age.

The majority of people however will have made, or have been credited with NI contributions before the 6 April 2016. In this case, when they reach the State Pension age, in most cases, their new State Pension will take into account their NI record prior to April 2016.

To be eligible for the new State Pension, you will usually require at least 10 ‘qualifying years’ on your NI payment records in order to receive any State Pension. These can be from before or after 6 April 2016, and they don’t have to be 10 years in a row.

Under the new State Pension system, how much you receive will usually be based upon your own National Insurance record only and not external assets, pensions or funds.

Qualifying Years, NI Credits & Eligibility for the State Pension

A qualifying year for the State Pension can be made up through the combining of a number of things including earnings, National Insurance credits, self-employment and voluntary contributions.

A qualifying year can be built up if:

• You are employed and earning over £184 a week (2021/23) from one employer and are paying National Insurance contributions
• You are employed and earning between £120 and £184 a week (2021/22) from one employer and are treated as having paid National Insurance contributions – further income variables can also be found at the above link.
• You are self-employed and paying Class 2 National Insurance contributions
• You make voluntary National Insurance contributions
• You receive National Insurance credits

If you do not earn enough to qualify for the above you can also receive National Insurance credits in a number of unique circumstances, including:

• Caring responsibilities (including receiving Child Benefit for a child under 12)
• You are claiming certain working age benefits such as Working Tax Credit, Jobseeker’s Allowance or Employment and Support Allowance

You may also need to apply for Child Benefit in order to receive your National Insurance credit even if you choose not to receive a payment.

How Much is the New State Pension

The State Pension amount, as mentioned will depend on the level and length of your NI contributions.

To get the basic State Pension you must have paid or been credited with National Insurance contributions.

The full basic State Pension is £137.60 per week.

If you have qualifying years on your record as of the 6 April 2016, a starting amount for your pension would be worked out and is the higher of either:

• The amount you would have got under the previous State Pension system up to 6 April 2016, or
• The amount you would get on your record to 6 April 2016 if the new State Pension had been in place at the start of your working life

Both amounts reflect any periods when you were contracted out of the Additional State Pension. Your ‘starting amount’ could be less than, more than or equal to the full new State Pension.

How Can I Forecast my State Pension?

You can get a State Pension forecast online from the Check your State Pension service. This provides personalised information, including your State Pension age, an estimate of how much State Pension you may get at that point and if you can increase this amount. It also allows you to view your National Insurance contribution history.

For more information please visit Your State Pension explained – GOV.UK (www.gov.uk)

What is a Private Pension Provision?

Planning for your retirement is a major concern for many as they approach the end of their working lives but for many, the specific benefits and range of pension arrangements can be confusing.

With that in mind, a private pension provision can be described as any arrangement that includes any pension benefit that is not provided by the state.

Whilst it is common to hold a state pension, a private pension provision is specifically defined as any registered pension scheme that is registered with HM Revenue & Customs that can benefit from certain tax reliefs and exemptions with the scheme aiming to provide benefits and payments upon retirement, ill-health and death.

Underpinning this is the notion that both employers and individuals are encouraged to contribute to a pension scheme so that when people begin to move towards retirement, they’ll have private pension income in addition to their State Pension and so will be less likely to rely on the State in retirement.

Tax Relief for Your Pension Provision

The amount of contributions paid into a pension arrangement will of course vary but are generally eligible for tax relief. Much of the investment growth isn’t taxed but pension income paid out on taking benefits is taxable.

The withdrawal of funds and tax liabilities thereafter is referred to as EET (exempt-exempt-taxed) – contributions are exempt from tax on the way in, funds are exempt from tax while invested but pension income is taxed when cashed out.

The term ‘registered pension scheme’ however has a different meaning depending on the type of scheme held. Here are some examples:

• Occupational Scheme: An occupational pension scheme from an employer will be considered a registered pension scheme in its own right.
• Personal Pension Policies: A personal pension policy, be it an individual policy or as a part of a group personal pension scheme, will be considered part of a pension provider’s registered pension scheme.
• Other Policies: Retirement annuities, individual buyouts and trustee proposed buyouts are also registered pension schemes in their own right.

Please Note: For those that pay higher or additional rates of  tax or whose pensions contributions are not paid through salary sacrifice, you will need to claim an additional or higher rate tax relief through your self assessment tax return.

Scheme Administrators

Every registered scheme will need a designated administrator or trustee(s).

For occupational pension schemes the administrator is normally considered to be the trustee(s), whereas with regards personal pension schemes, the scheme administrator is normally the pension provider.

An administrator’s duties include registering a scheme with HMRC, dealing with payment of tax to HMRC, providing information to HMRC and providing information to scheme members.

The Pensions Regulator – Overseeing Your Pensions

The TPR is the public body that protects workplace pensions in the UK. The TPR  works with employers and those service providers running pensions so that people can save safely for their retirement – they also act as point of recourse for pensions related complaints.

The TPR’s stated aim is to act as a strong, visible regulator that can help inspire confidence in the pensions system. The TPR’s key responsibilities include:

• Ensuring employers put their staff into a pension scheme and regularly pay money into it (known as ‘automatic enrolment’)
• Protecting people’s savings placed in workplace pensions
• improving the way that workplace pension schemes are run
• Reducing the risk of pension schemes ending up in the Pension Protection Fund (PPF)
• Making sure employers balance the needs of their defined benefit pension scheme with growing their business

Furthermore the stated TPR’s 2021-2022 priorities are to:

• Support workplace pensions schemes to deliver benefits through significant change driven by the global pandemic
• Protect pension savers across all scheme types through proactive and targeted regulatory interventions
• Provide clarity to, and promote the high standards of trusteeship, governance and administration we expect
• Intervene where appropriate so that defined benefit schemes achieve their long-term funding strategy and deliver on pension promises
• Ensure jobholders have an opportunity to save into a qualifying workplace pension through automatic enrolment
• Continue to build a regulator capable of meeting the future challenges we face

About the Pensions Regulator

The TPR is a public body sponsored by the Department for Work and Pensions (DWP). is based in Brighton and has around 500 staff. The TPR works closely with the Financial Conduct Authority who regulate personal pension schemes. The TPR also works closely with other public bodies including the DWP.

In short the TPR provides the oversight and vehicle to monitor and regulate your pensions – for all further information please visit https://www.thepensionsregulator.gov.uk

How Can Fintuity Help You?

We can assist you in a number of ways including a cutting edge Virtual Adviser, a library of up to date financial advice, a complimentary IFA meeting as well as a searchable blog with hundreds of articles and a complimentary financial health check to allow you to maximise your finances.

The best place to start however is with a financial health check to allow us to work out how best to help you.

Introducing Fintuity – The UK’s  Digital IFA!

Fintuity is like a traditional IFA, only we are an online adviser which means we can offer a more cost effective, time-sensitive and flexible service! We offer the full range of IFA services via our digital platform, at below industry rates and at your convenience. Please do not hesitate to get in touch to see how we can assist you.

For all enquiries please visit www.fintuity.com or contact Fintuity’s Communications Manager, Nic Cobb at nic.cobb@fintuity.com.

Please Note: All information, references and dates included in this article were accurate at the time of publishing.