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Saving for your retirement that’s arranged by your employer

Millions of workers are being automatically enrolled into a workplace pension by their employer. A workplace pension is a way of saving for your retirement that’s arranged by your employer.

A percentage of your pay is put into the pension scheme automatically every payday. In most cases, your employer and the Government also contribute money into the pension scheme for you. The money is used to pay you an income for the rest of your life when you start receiving the pension.

You can opt out if you want to, but that means losing out on employer and government contributions – and if you stay in, you’ll have your own pension that you get when you retire.

‘Auto-enrolment’
New legal duties, from October 2012, now require employers to automatically enrol their eligible employees into a qualifying pension scheme. The reform will be ‘staged’ over a six-year period, depending on the size of the employer.

This is called ‘automatic enrolment’. You may not see any changes if you’re already in a workplace pension scheme. Your workplace pension scheme will usually carry on as normal. But if your employer doesn’t make a contribution to your pension now, they will have to by
law when they ‘automatically enrol’
every worker.

If you are an employer, you need to make sure that your business is prepared as workplace pension reform becomes applicable to you.

When it comes to making contributions, there are two main things to consider, namely:

– the level of contributions you wish to make
– the definition of pay you wish to use

There are two main types of schemes

Defined contribution schemes
A defined contribution (DC) or money-purchase pension scheme is one that invests the money you pay into it, together with any employer’s contribution, and gives you an accumulated sum on retirement with which you can secure a pension income, either by buying an annuity or using income drawdown.

Occupational pension schemes are increasingly a DC, rather than defined benefit (DB), where the pension you receive is linked to salary and the number of years worked. As an alternative to a company pension scheme, some employers offer their workforce access to a Group Personal Pension (GPP) or stakeholder pension scheme.

External provider
In either case, this is run by an external pension provider (typically an insurance firm) and joined by members on an individual basis. It’s just like taking out a personal pension, although your employer may negotiate reduced management fees. They may also make a contribution on your behalf. GPPs are run on a DC basis, with each member building up an individual pension ‘pot’.

The amount you receive depends on the performance of the funds in which the money has been invested and what charges have been deducted.

Investment choice
Although your total pension pot usually increases each year you continue to pay into the scheme, there’s no way of accurately predicting what the final total will be and how much pension income this will provide. Unlike those who belong to a DB pension scheme, members of DC pension schemes have a degree of choice as to where their pension contributions are invested.
Many opt to put their money in the scheme’s ‘default fund’, but some will want to be more cautious, investing in cash funds and corporate bonds, while others may prefer a more ‘adventurous’ mix, with equity and overseas growth funds. GPPs also offer investment
choice, often between funds run by the pension provider.

Defined benefit schemes
A defined benefit (DB) pension scheme is one that promises to pay out a certain sum each year once you reach retirement age. This is normally based on the number of years you have paid into the scheme and your salary either when you leave or retire from the scheme (final salary), or an average of your salary while you were a member (career average). The amount you get depends on the scheme’s accrual rate. This is a fraction of your salary, multiplied by the number of years you were a contributing member.

Typically, these schemes have an accrual rate of 1/60th or 1/80th. In a 1/60th scheme, this means that if your salary was £30,000, and you worked at the firm for 30 years, your annual pension would be £15,000 (30 x 1/60th x £30,000 = £15,000).

Your pay at retirement
How your salary is defined depends on the type of scheme. In a final salary scheme, it is defined as your pay at retirement, or when you leave (if earlier). In a career average scheme, it is the average salary you’ve been paid for a certain number of years.

Final salary and career-average schemes offer the option of taking a tax-free lump sum when you begin drawing your pension. This is restricted to a maximum 25% of the value of the benefits to which you are entitled. The limit is based on receiving a pension for 20 years – so for someone entitled to £15,000 a year, the maximum lump sum might be £75,000 (25% x £15,000 x 20= £75,000).

Scheme’s ‘commutation factor’
Taking a lump sum at the outset may reduce the amount of pension you get each year. The amount you give up is determined by the scheme’s ‘commutation factor’. This dictates how much cash you receive for each £1 of pension you surrender. If it is 12, for example, and you take a £12,000 lump sum, your annual income will fall by £1,000.

Closed to new members
Most private sector schemes have now been closed to new members and replaced by defined contribution schemes. A large number remain open to existing members who are still employees, however, or those who have left the firm but built up contributions while they were there and retain the right to a ‘preserved pension’ when they reach retirement age.

Many public sector pensions are still defined benefit schemes, underwritten by central government. This has caused them to be called ‘gold-plated’, as they offer a certainty that few private sector schemes can now match. But, even in the public sector, pension promises are being cut back with a shift from final salary to career average and increases in the normal pension age.

Limiting the amount of tax relief you’re allowed

You can save as much as you like into a pension, but there is a limit on the amount of tax relief you’re allowed. The Lifetime Allowance for pensions is currently £1.25m (2014/15). In essence, the Lifetime Allowance is intended to cap the level of tax-advantaged pension funds that an individual can accumulate within their lifetime. You usually pay tax on any private pension savings above the lifetime allowance.

You’ll get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. Your pension provider will deduct the tax before you start getting your pension. You still need to report the tax deducted by filling in a Self Assessment tax return – you’ll need form SA101 if you’re using paper forms.

Rate of tax
The rate of tax you pay on pension savings above your Lifetime Allowance depends on how the money is paid to you – the rate is:

– 25% if you get it as a regular payment (‘annuity’)
– 55% if you get it as a lump sum

If you die before taking your pension,  HM Revenue & Customs bills the person who receives your pension for tax you owe on pension savings above your Lifetime Allowance.

If you have Lifetime Allowance protection
Lifetime Allowance protection increases your Lifetime Allowance. Check your protection certificate to work out your Lifetime Allowance if you have:

– primary protection
– enhanced protection
– fixed protection
– fixed protection 2014
– individual protection 2014

You’ll lose enhanced protection, fixed protection or fixed protection 2014 if you don’t opt out within a month of
being automatically enrolled in a workplace pension.

You may also lose enhanced protection, fixed protection or fixed protection 2014 if you:

– make new savings in a pension scheme
– consolidate pension scheme money

You may be able to apply for individual protection 2014 if your pension savings were above £1.25 million on 5 April 2014.

If you have the right to take your pension before 50
You may have a reduced Lifetime Allowance if you have the right to take your pension before you’re 50 under a pension scheme you joined before 2006. This only applies to people in certain jobs (e.g. professional sports, dance and modelling) who start taking their pension before they’re 55.

Your Lifetime Allowance isn’t reduced if you’re in a pension scheme for uniformed services (e.g. the armed forces, police and fire services).

Looking forward to a secure and financially independent retirement

It’s good to have choices when it comes to pensions and your retirement, but it’s also important to understand all your options from age 55 onwards.

With the money in your pension pot, you could buy an annuity, take some while leaving some invested, take it all at once, leave it all where it is, or a combination of these. Whatever you do, 25% will be tax-free with the rest subject to tax.

Buying an annuity – a guaranteed income for life
One of the options when it comes to what you do with your pension savings is to buy an annuity. There are a number of different types but they all pay a guaranteed, monthly, quarterly or annual sum until you die or for a fixed amount of time.

With an annuity:

– you know how much you’ll be getting and when
– you could be paid an income for the rest of your life
– there are a range of annuities to choose from
– once you’ve bought an annuity, you’re locked in

Annuity options

Lifetime Annuity
Lifetime Annuities provide you with a regular income for as long as you live. Your initial level of income will be based on some or all of the following factors:

– your age
– how long it is estimated you will live
– your health and lifestyle
– where you live

With a standard annuity, the annuity rates (and therefore the income you get) are based on the normal life expectancy of people of the same age as you.

With an enhanced or impaired life annuity, if you have a qualifying medical condition or lifestyle factor that may lower your life expectancy, you could get payments as much as 50%[1] higher than you might get from a standard annuity.

[1] Source – Which? website,
October 2014

Whatever type of lifetime annuity you qualify for, you then have options about how the annuity is set up.

These include:

Level or Escalating/Index- Linked Annuity
You can choose for the income you receive to remain the same throughout your lifetime. Although this might provide a higher starting income, it does mean that the value of your income will be worth less in real terms over time due to the effects of inflation.

You can instead choose for your income to increase each year, either at a set percentage or in line with inflation.

This helps to reduce the effects of inflation and maintain your buying power. However, it does mean that your starting income will be lower than if you chose a level annuity. It can prove good value if you live a long time.

Guaranteed period
You can choose for your income to be paid for a guaranteed period of time – say 10 years. If you die during this period, the income will continue to be paid out until the end of the guaranteed period. If you live longer than the guaranteed period you have chosen, your income will continue to be paid for the rest of your life. This option is usually inexpensive, and although it will reduce your income, it shouldn’t be significantly lower.

Joint Annuity
You can choose to include an income for your spouse, registered civil partner or other dependant when you die. The amount they get is likely to be an agreed percentage of your annuity income. Choosing this option will reduce the income that you get, and the higher the percentage you pass on, the lower your annuity income will be.

There are also other types of annuities available, such as:

Fixed-term Annuities
This type of annuity gives you an income for an agreed amount of time, usually between three and twenty years. It may also pay a specified ‘maturity amount’ when it ends, which can be re-invested in another retirement plan.

Investment-linked Annuities
Investment-linked annuities invest in a range of investments, which means the value of your fund and the income you receive from it can go down as well as
up. They do not provide a guaranteed level of income for life – the amount you will receive will change
depending on the performance of the underlying investments.

Flexible access to your pension pot
From 6 April 2015, you can access your pension savings as and when you like, taking however much money you want.

With flexible access to your pension pot, you could:

– take your varying amounts of money
– take 25% of it tax-free
– leave the rest invested so it can potentially grow
– pass on the money left when you die
– deplete your pension pot if you don’t budget properly

Two flexible options
There are a couple of flexible options for you to think about. They both allow you to take 25% of the money in your pension pot tax-free, but the way you do this is very different.

Flexible income drawdown
With flexible income drawdown, once you’ve taken your 25% tax-free allowance, the remainder of your pension pot is held within a drawdown plan. If invested, it will have the potential to continue to grow, adding to your retirement fund.

When it comes to taking your money out, you could arrange for a regular income, take it when you need it, or a combination of the two. There’s no limit to the amount of your pension pot you can take, but what you do draw will be subject to tax as you get your 25% tax-free allowance up front.

New rules will simplify the existing regime and come into force from April 2015, abolishing the 55% tax that applies to untouched defined contribution pension pots of people aged 75 or over, and to pensions from which money has already been withdrawn.

Partial Pension Encashment
Whatever you choose to do with your pension pot, 25% of what you’ve got is tax- free. With Partial Pension Encashment (PPE), you take a portion of your tax-free allowance every time you take money, so 25% of it is tax-free and the other 75% is taxed. By only taking as much money as you need when you need it, the rest of your pension pot is left invested and can potentially continue to grow. You can also continue making payments into it.

Each time you take a PPE, you may have to make a separate application, in which case this may not be the most convenient option if you’re looking to be paid a regular income. If you die with money left in your pension pot, it will go to your dependants and will not usually be
subject to tax.

Take your entire pension pot
From 6 April 2015, you’ll be able to take your entire pension pot at once from age 55. This gives you total control of your money, and 25% can be taken as a tax-free lump sum.

Until then, if you are aged 60 or over and either of the following conditions apply, you can take it all as a cash lump sum if:

– the total value of your pension savings is £30,000 or less
– you have pension pots of £10,000 or less. This can be done a maximum of three times for personal pensions and unlimited times for occupational schemes, and is allowed even if your total pension savings exceed £30,000

Leave your money for now
In the event that you do not need the money just yet, you might want to consider leaving your pension pot invested. Your pension pot has the potential to keep growing until you’re ready to take it and you can continue to work – it’s your decision when to stop.

The single most important decision you can make to help realise your long-term goals

Retirement planning involves making your plans for the future now – that means investing your money with the aim of maximising its value ready for when you retire. Careful retirement planning, the right mix of assets and starting sooner rather than later will help lead to the retirement you are looking for.

Historically, for many people, the traditional view of saving for retirement was to simply put your money into a pension, with few decisions to make in the run-up to your retirement date and no choice over how the pension was taken.

Reviewing your retirement planning
Having a pension today is recognised as just one important step along the path to achieving your dreams once you have stopped working. Now, not only must you carefully consider where you actually invest your pension money and how you are going to use your pension, but if appropriate you should also review other forms of retirement savings. Reviewing your retirement planning is critical and probably the single most important decision you can make to help you realise your long-term goals.

Different investment choices produce different results. It’s essential that you contact us to review all your retirement investments to make sure they are heading in the right direction. If your circumstances change, some investments may no longer be appropriate. It’s important to get these things right, as you will be relying on the provisions you make now to generate income after you retire.

Factors that will determine your strategy
When building or reviewing your pension portfolio, there are a number of factors that will determine your strategy, including the level of risk you are willing to take. This is likely to change throughout your life, which means your investment strategy will also need to change. Receiving professional advice plays a vital role in helping to make sure that your pension holdings match your risk profile and your investment goals.

Typically, people in the early years of the term of their pension may feel they have time to take more risks with their investments, to increase the potential for higher returns. As they approach retirement and the duration of the investment is shorter, they may prefer, more predictability, to start to plan for their future after work. Alternatively, if they have reached their pension age and are still investing part of their fund while drawing benefits, they may prefer to keep an element of greater risk in return for higher potential growth.

When it comes to retirement planning
Your 40s is ‘the golden decade’ when it comes to retirement planning. This is when you should be putting as much as possible into your pension to give your contributions time to grow.

In your 50s, you may want to start
making decisions about your retirement. If you are going to convert all of your retirement funds into income the moment you retire, you may wish to start reducing risk now. If you expect to keep it mainly invested, you may wish to keep a good weighting in investments based on shares. After all, with the growing trend towards taking work in retirement, many people may feel they can afford to keep their pension invested for longer while drawing an income.

Delaying the start of your retirement provision may have an obvious impact on the potential growth of your pension. Not only will the time period for growth potential be reduced, but you could also be passing up the opportunity for valuable tax relief.

Streamlined pension regime
Pensions have always provided a highly tax-efficient environment for long-term retirement investments. However, in April 2006, a streamlined pension regime introduced a number of additional benefits, including the potential to contribute larger sums into your pension fund when the timing is right for you.

Key pre-retirement considerations
People estimate that living reasonably comfortably in retirement requires around 60%[1] of the income you had while you were working. Everybody’s circumstances are different, but the key considerations for most people when they think about retiring will come down to factors such as:

– if they’re renting, paying a mortgage or mortgage-free
– if they have any debt
– if they plan to keep working
– how much money they have saved in pensions and other investments

[1] Source: Scottish Widows,
October 2014