Common UK Pension Planning Questions
You shouldn’t be expected to understand a lot of the financial phrases and jargon used in pension statements. There is no stupid question when it comes to understanding your money. It’s vital to understand your options before making financial adjustments.
Download our FREE Pension Jargon Buster for a full glossary of terms to help you understand your pension statements and planning options.
Private pension plans operate under member-directed investment mandates. Ultimately, it is up to the pension holder to decide how the money is actually invested. Most pension members take advice when investing pension money, which is certainly wise when considering that investment management is highly complex and scams are unfortunately commonplace.
Most pension money is invested into pension or investment ‘funds’. These are simply a collection of savers’ funds, collected together into one pot and invested professionally by an investment management team. This allows both a highly skilled team to manage funds under one mandate (i.e. to one objective, with a generalised risk approach) as well as give them purchasing power in the market.
There are two key elements to pension withdrawals. UK pensions can release a ‘Pension Commencement Lump Sum’ (“PCLS”). This is a tax free withdrawal, typically taken as a lump sum when you begin your pension.
With a private pension, current rules allow 25% of the fund value to be withdrawn free of tax, as a PCLS. This doesn’t have to be taken all at once, but can be withdrawn across tax years under what is known as ‘phased withdrawal’. This can help reduce an individual’s exposure to income tax over time.
Beyond the PCLS entitlement, withdrawals from a private pension are taxable as income, and most UK pension plans operate automatic tax deduction and pay you ‘net’ of tax. This is because most UK pensions operate under the ‘Pay As You Earn’ (PAYE) payroll system.
A pension PCLS is limited, it:
- Cannot be taken before minimum pension age (currently 55 years)
- Is limited by the lifetime allowance
A defined benefit, or ‘final salary’ pension is different, at-retirement, you will usually be offered at least two income plan options, with and without a PCLS. Under this type of pension scheme, the PCLS is not taxed, but the income payments are taxed at source, under PAYE according to your UK tax code.
If you hold total UK pension wealth in excess of the lifetime allowance, ensure you plan ahead before opening your pension, see our guidance on Lifetime Allowance Planning
For more information about UK tax, see our Free Guide to UK Tax for Expats
Most UK pensions operate a payroll to pay income to its members. Just like having a job, your income is put through ‘Pay As You Earn’ (PAYE), this means that the pension company has your tax code, and will deduct income tax automatically at source. It’s important to note that while pension income is taxable, it is not subject to National Insurance deductions.
If you have an overseas pension, such as a QROPS, it is your responsibility to declare that income to HMRC under Self Assessment. The complexities of QROPS reporting are covered in our free QROPS guide.
If you live abroad and have a UK pension, explore your options to utilise Double Taxation Agreements and gain an ‘NT’ tax code in order to apply for income to be treated correctly, if you qualify as a non-UK taxpayer.
If you hold a QROPS and are planning on taking withdrawals, it is important that you first understand your tax liabilities and reporting requirements.
Firstly, the QROPS will have a Pension Commencement Lump Sum (PCLS) entitlement. This is typically free of taxation for the country where the QROPS is held, but may be subject to ‘local’ tax where you live.
Secondly, when withdrawing income, it will be taxable in both the state where the QROPS is held, as well as the jurisdiction where you live. This could result in double-tax, however most states are protected under a Double Taxation Agreement (DTA). You must check this for details about how and where income is taxable. Typically when a DTA is in place, the QROPS will pay income “gross” (without tax deduction) but you will be responsible for reporting, and paying, tax where you live.
See our Guide to QROPS and International Pensions for more detail, and contact us to be connected to an expert adviser with international pensions experience.
The lifetime allowance is the maximum a UK resident can save into UK pensions before being subject to a tax on the excess. There are many planning options available to those who may, or have, breached the lifetime allowance across their UK pension savings.
The current UK lifetime allowance for 2020/21 is £1,073,100 and is scheduled to rise each year in line with the Consumer Prices Index (CPI).
Read our FREE guide to the LTA for lots more information, ways to calculate your LTA exposure and key planning tips.
If you hold a private pension, or any pension plan holding a fund value, then you will probably be offered the option to ‘buy an annuity’ when you reach retirement age.
Buying an annuity, is essentially using your pension savings to purchase an income plan; a contract of income for the rest of your life. This comes with both benefits and drawbacks. The clear benefits of an annuity is the surety over income for your lifetime. While you no longer hold your pension fund, you have a guaranteed income plan in place for the rest of your life with which you can budget.
An annuity does have limitations, though. Firstly, it must be pre-defined at outset, so if you don’t build-in death benefits or inflation-linking, it can’t be added later. Also, there is no flexibility over the income you are paid, and you no longer have any access to your pension fund.
For more FREE information about retirement options, read our Retirement Options Guide.
Investment risk can sound scary to people who’ve never held money in the investment markets before. Risk is a worrying word, and it is used to ensure investors stay alert and operate with caution.
Investment risk is typically a grading used to assess the comfort an investor has with having their money exposed to the markets. Talk to your adviser about the risk approach they have assessed to be right for you and what volatility you could expect over the years to come.
A balanced approach to investing would typically mean that you should hold a diversified portfolio, with a ‘bit of everything’ under the bonnet. This means your portfolio would likely hold some:
- property, which typically accounts for stakes in large offices, airports, malls, developments etc
- stocks and shares, being investment held with large corporations, typically based in Western countries, such as those listed on the FTSE or US markets
- government gilts, which are secure loans to governments carrying fixed and reliable returns
- commodities- actual or optional holdings in physical assets such as gold or oil
- cash and currency
The different types of holdings come with different types and levels of risk, but are balanced (“weighted”) to ensure returns, and downturns, fit in line with a particular risk approach.
When conducting second opinions, we have found a handful of pension members who appear to have zero-valued holdings. This means that when you are looking at your pension statement, there is one or several investment holdings without any value. This can be for a number of reasons.
Legitimate, regulated and trustworthy investment funds are traded daily. This means that the investment can be valued at least once a day and your statement will reflect that true, up to date, valuation. Some termed investments, structured notes or products may not have their value calculated so frequently, or have no second hand trade option – i.e. the investment may not be traded from the point you invested to the pre-defined point of time when you get your money back.
If you hold any investments which carry a zero-value, get a second opinion. While not all termed investments are poor, they may need close monitoring and in some cases, a second hand trade is possible even when a trade-value isn’t readily available.
Pensions essentially have three layers of cost,
- The pension plan
- This is the cost for the actual running and administration of the plan. Most large insurance companies such as Scottish Widows, Standard Life, Aegon, Aviva etc offer private pension plans at very competitive rates. A simple personal pension plan could be described as ‘wrapped’ for simplification, and typically charges a percentage fee, which should be under 0.5% pa
- More complex or better functioning plans such as the Self Invested Personal Pension (SIPP) operate as a simple ‘wrapper’, within which the member holds a separate investment plan, or multiple plans, and cash accounts, which can contain different currencies for non-UK residents. SIPPs or their overseas counterparts, the QROPS, usually carry fixed-fees, which are often more beneficial for large fund values.
- The Investment Strategy
- Under a simple personal pension, the investment strategy is typically offered by the pension provider. For example, an Aviva Personal Pension is often invested into the Aviva Managed Fund. This can keep costs low, but is not a sophisticated investment strategy suited to more discerning investors.
- With a SIPP or QROPS, an investment plan is held within the pension. SIPPs can invest in commercial property, direct shares, bonds or offer a trading option via an investment platform. Dependent on the strategy employed, the investment plan plus investment management could cost up to 2% pa. If you are cost sensitive, explore passive or automated investment strategies, which can be employed for less than 0.5% pa
- The most astute or engaged investors may consider personalised investment strategies. These are best suited to those with high fund values, in excess of £500,000. Discretionary Fund Management or Stockbroking services can be employed for 0.5-1% pa
- Professional Advice
- A qualified, insured and regulated adviser should not be cheap, and certainly not appear ‘free’
- If you live in the UK, Australia or the US, you are protected by charging disclosure regulations and restrictions. You should expect to pay up to 4% for any initial arrangement and investment implementation, plus an ongoing fee of 0.5-1.5% per year for the ongoing management of your plan and intermediary duties.
- If you live outside of fee-based regulation, your advisory fees may be in-built with the product costs. This will mean you could expect to pay a little more for your pension wrapper and investment plan, this could be an uplift of 0.5-1.5% pa, but ensure you ask your consultant how they are paid.
If you’re unsure of the costs associated with your pension plan/s, or want to review your advisory and investment options, consider getting a second opinion.
The short answer is no.
Any firms who claim to be able to open your UK pension funds before minimum pension age (55 years) are running a scam. There are ways to access your money if, for example, you are in serious ill health and unable to work, but if you are fit and well then please beware of offers in this area.
Most ‘pension busting’ exercises involve a loan being charged over your funds with an eye-watering interest rate. At best, when legal, they aim to take back a lot more than you were given when you reach an age from which you can access your pension. That means not only are you ‘releasing’ funds from your pension early (and potentially spending all your retirement funds) but you are also building up a lot of stress headaches for the future when you have to review and unravel any complex arrangements you’ve linked to your pension.
If you have concerns about the advice you’ve received, or think you may have been targeted by a scam, read our page about financial scams and regulation and consider getting a second opinion.
For the past couple of years, we have seen pension transfer values beyond expectations, in a good way! Pension transfer values are fairly calculated to reflect their exchange for a guaranteed lifetime income. While a large pension ‘pot’ often appears very attractive, it is essentially a capitalised value of what you would get in income, over your lifetime, if you stay in the pension scheme.
Read our Guide to Pension Transfers for more.
Pension Cash Equivalent Transfer Values (CETVs) take note of several market factors and measures. Transfer values are currently benefiting from:
- low long term gilt yields, which form a key component of the transfer calculation
- increasing life expectancy, meaning the deemed long-term cost of paying out a pension for a member’s lifetime increasing
- companies wanting to reduce long-term pension liabilities, in some cases offering transfer-out incentives
Read our Guide to Pension Transfers for more.
From the submission of ALL correctly completed documentation to the relevant parties, a transfer of funds typically takes up to 6 months.
A pension specialist is a financial adviser who has the required qualifications and FCA permissions in order to provide advice upon the transfer of ‘safeguarded’ pension benefits. Safeguarded benefits are typically final salary pension plans, or any pension with an important guarantee.
It is a regulatory requirement that a member of a safeguarded pension worth over £30,000 must take professional regulated advice from a pension transfer specialist.
Add to our pension FAQ!
Our Frequently Asked Question page is made up of genuine questions we’ve been sent by our visitors.
Please get in touch if you have any questions so that we can help others. We want our FAQ to help everyone better understand UK pensions and retirement planning.
We will answer any questions you have, and if we don’t know the answer, we will find out for you! Head to our news and blog pages for regular pension news updates and bulletins. We update our blog with any questions asked from clients across the world.