Retirement Planning Advice

All personal pensions work on a ‘money purchase’ basis. This means that the money you save each month or each year into your Personal pension plan is invested (typically in investment funds) and is then used at retirement to provide you with pension benefits. So in theory the more you save the better your pension should be at retirement.

At Retirement

On reaching retirement, you use the money that has built up in your personal pension either as cash (up to 25% of which is normally tax free), income or a combination of cash and income.

A personal pension is really just a long term savings plan that is designed to provide you with a tax efficient way of saving for retirement. The value of these pension savings will be dependent upon how much money you've paid in, how the funds have been invested (in line with your attitude to risk) how long you have had your money invested and how well the funds have performed.

At retirement, provision can be made to protect your pension from the effects of inflation, protect your income in the event of your death, and make provision for your spouse or dependants. Benefits can be drawn from age 55 onwards, however, this is due to change to 57 in 2028. This move is in line with the changes to stage pension age.

Self invested Personal Pensions (SIPPs)

SIPPs are virtually the same as personal pensions but for the fact that they provide greater flexibility in terms of the assets that you can invest in within the pension.

They have identical tax treatment to Personal Pensions, the limits on contributions are the same, the tax relief is the same and they have the same flexibility in retirement.

SIPPs are generally sold when you want an element of flexibility over where your money is invested to fit in with your overall investment strategy. Many SIPP providers allow access to virtually the whole market of assets within your SIPP, giving considerable flexibility with how your money is invested. Personal Pensions were typically limited to a far more restricted fund range, however, some modern day personal pensions do allow some of the flexibility available via a SIPP.

One reason a SIPP is so attractive is that you can take out a mortgage within the SIPP to help you buy commercial property for investment purposes. This can include your own company’s office, factory or shop. SIPPs can borrow up to 50% of their net asset value allowing you to buy a property worth £150,000 with only £100,000 of pension savings. All rental payments will come into your pension tax-free and will be deemed as income generated by the investment and not a contribution. You can either keep the property when you retire within the SIPP and utilise the rental income as part of your retirement income or sell the property and use the money to provide you an income.

 

 

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Small Self Administered Schemes (SSAS)

These are a money purchase company pension scheme which were originally designed for smaller companies to allow greater flexibility for a company wanting to provide pensions to senior-executives.

A SSAS provides all the flexibility of a SIPP and was very popular prior to the introduction of SIPPs. The main additional benefit of a SSAS over a SIPP is that it offers you the facility to “loanback” up to 50% of the net asset value of the SSAS to the sponsoring company, however, this is subject to strict guidelines. SSAS are regulated by the pensions regulator.

Defined Benefit Schemes

With a defined benefit scheme or a final salary scheme (as they are often called), the pension you receive at retirement is related to your final salary before retirement or Date of leaving your employer and the number of years of service you have had with your employer.

As your salary in the years leading up to your retirement is normally at its highest, this method of calculating retirement benefits secures a very good pension, particularly if you have been with the employer for several years. The retirement pension benefits often include additional provision for a spouse and dependants’ pension, inflation proofing or escalation of income. Many schemes also offer a tax free lump sum but you would be sacrificing some guaranteed income in exchange for the lump sum.

If you are lucky enough to be in a final salary pension scheme, it is normally good advice to stay in it. However, there are circumstances such as ill health which might make it beneficial to move your benefits to a money purchase arrangement.

"We have now worked with Saj for nearly five years, going through the sale of my business, investment of the proceeds and pension fund, rationalising our investments into a series of manageable pots and helping with inheritance tax planning. Saj has done an immense amount of research into available and relevant options, clearly understood our needs in terms of balancing risk with the need for regular income and security, but most importantly has shown immense patience – one of my early statements was that I will listen, but am unlikely to take more than 10% of the advice given! Sufficient to say that this percentage is now much higher and we have a more balanced lifestyle, as well as gradually securing our children’s future"

Dr JB - Chislehurst