Many people wrongly think all forms of pension are set in stone and can’t be altered – but there are some helpful mechanisms in place which prove this isn’t always true. Pension transfers are when you switch or change your pension provider and transfer all money from your existing plan to a new one, thereby ending the original plan.
Typically, this can happen naturally if you change jobs and your new job has a different pension scheme, but you can also choose to do it voluntarily. Some of the reasons for doing it yourself might be if your own pension plan charges large administrative costs that you want to avoid by transferring to a pension plan with lower fees or if you want to add a personal pension plan to a work-based pension plan to take advantage of any employer contributions. Or it could simply be because your current pension provider are no longer offering the service.
Whatever the reason, pension transfers can be advantageous, but you should always make sure that you are doing it for the right reasons, and that you will be better off with your new scheme. This is a big decision, and it is always worth seeking financial advice before you make your choice.
A financial advisor will be able to tell you the benefits, and drawbacks, of transferring your pension plan, how it works, and point you in the right direction.
They will also be able to talk you through your current pension plan, pointing out anything you don’t understand, before suggesting alternatives which may benefit you more in the long run. You may also decide that you want to start paying more, or less, into your pension plan in terms of your monthly contribution, depending on any changes in circumstances you may have had since you first starting paying into your scheme.
Once you make your pension transfer, your monthly payments will stop going into your old plan, and start going into your new pension provider. One common reason for transferring your pension is if you want to transfer from your employers’ final salary pension scheme to a personal plan.
Many employers are now offering cash incentives to their employees to persuade them to do just that, as a final salary pension can prove to be expensive for them. If you want to transfer from your employers’ final salary pension scheme to a personal plan, you will need to get a ‘Statement of Entitlement’ from the administrators of your pension to find out the value of your plan.
You can do this by making a written request to the administrators and within three months, they should then send you a transfer value, which will typically be valid for another three months. This figure is not the total amount which you have paid into the pension scheme during the time in which you have had it, but rather the amount of money which would need to be paid in for the company to provide your pension entitlement under the final salary scheme.
Once you have this transfer value, you can decide whether or not to go ahead with the pension transfer – and if you do, make sure it is before the guarantee date on your Statement of Entitlement – and your pension scheme administrator will then be required to make the transfer complete inside of six months from when you lodged your request.
Pension transfers can therefore often be a way of saving money and getting a deal which in the long run can be far more suitable when it comes to planning for your future.
UNISON is balloting members for industrial action over the threat to your pension. Vote ‘yes’ and together we can send a powerful message to protect our pensions. Visit: www.unison.org.uk
Prior to ‘A’ Day, pensions schemes were essentially comprised of basic state pensions, a variety of earnings related pensions in succession, Occupational and Individual pension schemes. Most of these schemes have continued after ‘A’ Day, but not without some variations in their relevance and more so in the tax legislation that governs them.
State pension, before ‘A’ Day assumed these forms: basic state pension and some top-ups. The level of basic state pension one is entitled to depends on the level of National Insurance Contributions (NICs) built up. The top-ups were additional earnings related pension schemes. State Graduated Pension Scheme was the first to be introduced and was utilised from 1961 to 1975. It was replaced by State Earnings Related Pensions Schme (SERPS) from 1978 to 2002. In 2002, a new top-up showed its head, replacing SERPS, and was called the State Second Pension Scheme (S2P). S2P has still continued after ‘A’ Day, and those with pensions that amassed benefits between 1961 and 1975 will still benefit from State Graduated Pension Scheme, whereas those with benefits built up between 1978 and 2002, will still enjoy SERPS. Basic State Pension has not changed, however.
Occupational schemes are also called ‘employer sponsored arrangements’. Before ‘A’ Day, employers had to contribute to this scheme, and some employees could be asked to contribute as a condition of membership. The self-employed and those in partnership could not contribute. Occupational pension schemes were governed by rules set by Her Majesty’s Revenue and Customs (HMRC) [name given to the merger of Inland Revenue and Customs and Excise]. These rules were embodied in a book called the Practice Notes. Occupational schemes were said to be ‘benefit’ driven, which meant that there was a limit as to the benefits that could be accrued in a scheme enforced by the HMRC rules.
Employee sponsored arrangements took a wide variety of forms namely: Final Salary , Contracted In Money Purchase (CIMP), Contracted Out Money Purchase (COMP), Additional Voluntary Contribution (AVC), Free Standing Additional Voluntary Contribution (FSAVC), Executive Personal Pension (EPP), Section 32 Buy Out Contracts or Bonds, and Small Self Administered Schemes (SSASs).
The benefit built up under a Final Salary scheme forms a proportion of the final renumeration of the employee. This scheme is as a result also called Defined Benefit, since the benefit can be established with certainty.
The other employer sponsored arrangements mentioned above have continued after ‘A’ Day, but EPP, FSAVC and Section 32 Buy Out Contracts, have become somewhat redundant because the special features which they bore are no longer needed. Unlike the Final Salary scheme, the benefit under the other employer sponsored arrangements can not be determined for sure. It depends on the size of the contribution in the fund, at the time of retirement or death, and the annuity rates existent at retirement. These schemes are thus collectively known as Money Purchase schemes.
One remarkable change that has taken place with the advent of ‘A’ Day, has been the discarding of the HMRC rules that governed the employee sponsored arrangements. The Practice Notes have been replaced by The Registered Pension Schemes Manual. There is now no limit as to the amount of benefits that can be built up in a scheme, although there will be tax charges if the total benefits amassed under all schemes exceed a lifetime allowance.
Has ‘A’ Day gotten rid of every benefit and contribution rule that existed in every scheme? The answer is ‘no’. As regards the quantitative benefits and contributions that can be made under occupational pension schemes, there is no limit, but various schemes will have their own rules regarding other matters of benefits and contributions. It is likely that some schemes will maintain these rules after ‘A’ Day, and hence participants will not see much change, in spite of there been a new tax legislations introduced by the Registered Pensions Schemes Manual.
Another category of pension that existed before ‘A’ Day was Individual pensions. This was also governed by HMRC rules, but they have been under the control of rules embodied in what is callled Guidance Notes after 5th April, 2006. They used to be ‘contribution driven’, which means that the HMRC rules placed a limit on the amount of contributions that a participant could make. There is however no such limitation after ‘A’ Day. The employed, self-employed, as well as those in partnerships could contribute, and there has been no change in this aspect of Individual pensions.
The main types of Individual pensions that existed were: Personal Pension Plans (PPPs), Group Personal Pensions (GPPs), Stakeholder Pension Plans, Self Invested Pension Plans (SIPPs), and Retirement Annuity Contracts (RACs). All these schemes are extant, except that the differences that existed between RACs and the other Individual pensions have vanished. The benefits under an Individual pension cannot be guaranteed, and hence these schemes may be called ‘Money Purchase’ schemes.
Most of the pension schemes that one comes across today were give birth to prior to ‘A’ Day. It is, however, important to note that Cash Balance Plans, is a new scheme, that came into play after ‘A’ Day. Cash Balance Plans do bear resemblance to both Defined Benefit schemes and Money Purchase schemes. It looks like Money Purchase in the sense that part of the benefit depends on the size of the fund at retirement or death, and as such cannot be guaranteed. There is as well a feature of Defined Benefit, in that there is a promise of minimum return on contribution or a specified monetary amount at retirement.
To sum it all up, ‘A’ Day has provided a more simplified tax legislation and regulatory regime. It has let to a variety of changes, the most important perhaps being the eradication of limits regarding benefits that can be accrued and contributions which can be made. In other words, it has gotten rid of what used to be a marked difference between Occupational and Individual Pension schemes.
David Opoku. BA Hons. Accounting and Finance. Certified Financial Adviser and Stockbroker. E-mail: davido312@aol.com
I have a BA Hons. degree in Accounting and Finance. I am currently specialising in Financial planning.
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It has been claimed that A-Day is set to be the biggest shake-up that pensions in the UK have experienced in over 60 years but it has also left many wondering what A-Day is and what pension advice they will need to prepare for it. Below we take a closer look at A-Day and what it might mean for the average worker.
What is A-Day?
A-Day refers to the changes to the UK pensions which is set to occur in April this year.
What is the aim of A-Day?
The main idea behind A-Day is to “increase choice and flexibility for all”. The government’s broad aim in the introduction of the new pension rules in April 2006 is to simplify the existing pension rules. The rules will affect all pensions including personal and work pensions. In a nutshell, A-Day aims to take the pressure off agencies that need to give pension advice by actually simplifying the whole pension system.
What pension changes will occur with A-Day?
oThe Standardisation of Tax Free Cash – The tax-free cash sum entitlement currently differs between Pension Schemes. Furthermore, the entitlement in the Occupational Pension Schemes can actually be less than 25%. The simplified pension rules will ensure that Tax Free Cash allowance of all Pension Schemes is set at 25% of the fund value as standard. If you have an occupational pension where the tax-free cash entitlement is higher than 25% then you will need to seek pension advice from an experienced Independent Financial Adviser, who will be able to help you protect this right.
oAlternatively Secured Pension – An Alternatively Secured Pension will also be introduced which will mean that after the age of 75 withdrawal of income will be known as “Alternatively Secured Pension” and will be similar to income drawdown. This allows you to draw an income, up to a maximum of 70% of the highest single-life annuity, each year from your pension fund.
oGreater Flexibility in Investment – There will also be greater flexibility in investment including the provision enabling you to hold residential property within your pension fund. You may also be able to sell and buy these properties between individuals.
oContributions – The amount you can currently contribute into a pension scheme is capped but A-Day is set to change all this. As of April this year, there will be no maximum amount of pension saving.
Who will be affected by these pension changes?
Actually nearly everybody who will work or has worked will be affected by these pension simplification rules. It will impact on any individual who already has a pension in place or any individual who will start a pension plan at any point in the future.
Where is the best place to get pension advice regarding A-Day?
It is always highly advisable to discuss any pension advice you may require with a professionally trained financial adviser. It is also worth noting that you should always check that any financial adviser you speak to is registered with the FSA and is thereby duty bound to offer you unbiased advice.
Elizabeth Grant writes exclusively for The Mortgage Broker specialist websites. To read more of Elizabeth’s articles on Adverse Credit Mortgages please visit the Pension Transfers website [http://www.pension-transfers.com].
More and more people are becoming aware of their need to save for retirement. With the government failing to provide a sufficient income in retirement for most people the realisation that we might all be stacking shelves at 80 is real and should be addressed as early as possible.
So the question is what is the best way to save for retirement? Well this really depends on you as a person. There are various different methods you can use and all have their advantages. Two of the most popular are a personal pension or an ISA.
Personal Pension Plan
The government pays a tax rebate straight into your pension every time you make a contribution. This is an excellent way of seeing your money jump in value overnight.
You can claim a further tax rebate via your tax return if you are a higher rate taxpayer, which makes contributions to a pension even more attractive.
You can choose a wide variety of investments once your money is in a pension plan as long as you choose a good provider that allows you to access unit trusts, investment trusts, shares, ETFs, bonds and gilts.
Profits made from investments inside your pension plan are totally free of capital gains tax.
Your money is tied up until retirement age, which can be a good thing because it stops you being able to access it and running down your retirement fund so therefore helps to keep you more disciplined.
The maximum contribution limits are quite high so are unlikely to be an issue. Currently the most you can contribute to a personal pension each year is 100% of your gross annual earnings.
You can take up to 25% of your total pension fund at retirement as a tax free cash lump sum.
An annuity will provide you with an income for life, which is simple and hassle free.
The income you receive from an annuity will be liable to income tax.
ISA
You can invest up to 11,280 (2012/13) each tax year into an ISA.
There is no tax rebate available on investments into an ISA.
Any profits made on investments within your ISA are totally free from capital gains tax.
You can invest in a wide variety of investments as long as you open your ISA with a good provider. These include unit trusts, investment trusts, shares, ETFs, as well as bonds and gilts.
You can access the money within your ISA whenever you like and can access as little or as much as you want to. This makes an ISA a much more flexible way to save for retirement but does not impose any discipline by forcing you to hold on to your investments until retirement like a pension would.
You can withdraw the money from your ISA at any age and so could choose to take this earlier, say before you retire if you are looking to reduce your hours leading up to full retirement.
You do not have to purchase an annuity when you withdraw your money from an ISA.
Instead you could use your money in any way you like to provide you with an income for life.
One way would be to slowly withdraw the money from your ISA which would mean no tax is payable on the ‘income’ you take.
The 2012/13 ISA allowance allows you to take good advantage of tax effciient invetsment routes and the ISA has greater flexibility when taking your money out at retirement, with the added benefit of being able to access your money at any time. You can use the money in any way that suits. However there is no generous tax rebate on investment into an ISA.
Unless you are very disciplined then the temptation to access the money invested in an ISA at some point during your lifetime might prove too strong. This is dangerous as it could significantly reduce your eventual income at retirement. So by not providing access to the money at all until you reach retirement a pension could work well for some.
The pension also provides those tax rebates when you invest new money, although it forces you to buy an annuity at retirement, the income from which would be liable to income tax.
As an added twist another popular retirement income investment to consider is property. This has become very popular over recent years with the sustained increase in house prices.
Ideally a comparison of Pension v ISA v Property would help you assess what is best for you.
In reality whichever option you decide is best for you the most important thing is that you do something. There is no reason why these options should be considered exclusive of each other. They could certainly work well together and provide you with the best of both worlds. If you need help then speak to an independent financial adviser to help you decide which option might be best for you then speak to an independent financial adviser.
Please note that the considerations highlighted above do not form any sort of personal recommendation. They are intended to highlight the relative merits of each option. Please also consider that tax levels, basis and reliefs are based on individual circumstances and are liable to change.
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