Five things you wanted to know about pensions
BUT HAVEN’T GOT ROUND TO ASKING
The world of pensions is complex and ever-changing. You may have a bunch of questions that you’re saving up to ask your adviser next time you have a catch up.
1. SHOULD I BE CONCERNED ABOUT BREACHING THE PENSIONS LIFETIME ALLOWANCE?
Tax rules state that savings in a pension exceeding the Lifetime Allowance of £1,073,1001 will attract a tax charge of up to 55%.
Having a pension worth over £1million might sound like a pipe dream, but the reality is more and more people are breaching the limit.
In the tax year 2010/11, HM Revenue & Customs (HMRC) collected £32million from people breaching the Lifetime Allowance2. This soared to £342 million in 2019/20.
With the threshold frozen until 2026, this upward trend could continue to climb.
You may be able to use certain protection rules to lift your limit. However, if these are unavailable to you, certain benefits might make footing the tax bill worthwhile. You can talk to your adviser about the right options for you.
2. I’M LUCKY TO HAVE A FINAL SALARY PENSION – SHOULD I BE WORRIED ABOUT THE SECURITY OF MY SCHEME?
When faced with company insolvency, large employers can struggle to fund their final salary pension scheme.
However, there’s a safety net for final salary pension holders as schemes are protected by the Pension Protection Fund (PPF). Its protections meant that if your employer or former employer fails and your scheme can’t afford to pay you what you have been promised, the PPF will compensate you3.
“When it’s time to start drawing on retirement savings it’s vital to ensure your savings last as long as you need them to.”
3. SHOULD I TRANSFER OUT OF MY FINAL SALARY SCHEME?
Transferring your retirement benefits out of a final salary pension scheme means giving up an income for life in return for a cash value. The Financial Conduct Authority and The Pensions Regulator believe that it will be in most people’s best interests to keep their defined benefit pension4.
However, if you do decide that you want to transfer, and your pension is worth more than £30,000, it’s a legal requirement5 for you to seek advice from a financial adviser.
Remember, there are many scams operating in pensions. There could be fraudsters trying to encourage you to transfer your money overseas, for example, into fake investment schemes. Be on your guard.
4. WILL MY PENSION SAVINGS LAST?
When it’s time to start drawing on retirement savings it’s vital to ensure your savings last as long as you need them to.
An adviser can help predict how long your savings are likely to last, though it’s not an exact science because the amount in your pot depends on a number of factors, including how the stock markets perform. An adviser could help set sensible withdrawal levels, with an idea of how long the savings would last.
Professionals have access to sophisticated cash-flow modelling which can help forecast of whether your investments – including your pension – are going to be sufficient to cover future lifetime costs.
5. WHAT HAPPENS TO PENSIONS IN A DIVORCE?
When it comes to splitting pension pots, there are typically three options.
Pension sharing is the most common as it provides a clean break between parties. The Court will issue a pension sharing order (PSO) stating how much of the pension, the ex-spouse or partner is entitled to receive, and each party can decide what to do with their share independently.
There’s also the option to “offset”, where you balance the value of the pension against another asset. For example, your ex might keep all of their pension fund, and as a trade-off you get more of a share, or all of the family home.
The third option is to seek a pension attachment order. Under this order a percentage of your pension that you get, each week or month, is paid to your ex, or a percentage of theirs is paid to you.
Advice is crucial to ensure the right decisions are made for all the family.