A recent FCA (Financial Conduct Authority) review of retirement outcomes for individuals, who do not have financial advice, shows that many consumers do not fully understand what they can and can't do with their pensions. (1)
They acknowledge that they do not understand all of their options but told researches they are reluctant to seek professional advice. Instead they often take advice from friends or family or copy what others are doing.
Unfortunately as each person's circumstances and needs are different, copying others who may also lack a full understanding of all the options available can lead can lead to obtaining poor value from pension savings.
As part of pensions awareness week we aim to expose some of the common myths which prevent individuals making the most of their retirement planning.
Even if someone is planning to move in a few months, it is still worth joining an employer’s pension scheme. Not doing so can mean missing out on employer contributions to a pension plan which are tax free, along with tax relief on their own payments into it.
Most employers offer investment based schemes which belong to the employee and are not exclusively linked to any one employer. So on leaving a job you keep the fund built up, including what the employer has paid in and any growth on top.
If the pension is linked only to one employer, the value of the plan still belongs only to the member and may be investment based or a final salary scheme. Both types offer you the option to transfer your pension plan to a plan in your own name or to retain it in the scheme until you are ready to retire.
This is a complex decision and advice on the options should be sought before giving up valuable guaranteed benefits.
The financial services industry is working on a Pensions Dashboard that will give each person a full summary of all their pensions. This should make understanding pensions from different jobs easier. It is expected to be fully operational by 2019.
Not joining an employer sponsored scheme is rarely a good choice and means that pension savings will take longer to grow to the fund needed for a comfortable retirement.
It is true that State Pension Age has increased over recent years, reflecting increases in average life expectation. Anyone starting work now will have to work a few years longer than their parents before their State pension becomes payable. A recent independent review has recommended further increases in State Pension Age so that it continues to be affordable for the taxpayer when life expectation is also increasing.
However, it is not true that you have to reach the State Pension Age before you can retire. Private pensions can be drawn up to 10 years prior to State Pension Age so currently those aged 55 and over can access private pensions.
Private pensions funded with your own payments, or topped up by your employer, can also offer the flexibility of taking lump sums or a regular income which can be varied.
So for example, if your State Pension is not payable till age 68 but you would prefer to retire sooner, you could withdraw funds from your private pension first, to fill the gap in your income. You may choose to reduce those withdrawals, once you also have the State pension in payment, or can continue with them if you need more income.
For example, a 43 year old paying in £100 per month could build up a fund to produce the equivalent of 3 years State pension payable from age 65, so they need not wait till 68 to retire. (2)
Both lump sums of varying amounts and income withdrawals on a regular fixed, or occasional and variable basis are possible. Up to 25% of the pension fund can be paid tax free, the balance is subject to income tax at the rate paid by the individual at the time.
Since 2006 there is no such thing as a statutory retirement age. With a few exceptions, no employer can insist that an employee must retire because they are a given age. Consequently, retirement is increasingly a process rather than a one off event. Having private pensions which offer flexible access can make it possible to start this process sooner than the State retirement age.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning. Tax rates and allowances may change in future.
(1) FCA Retirement Outcomes Review Interim Report July 2017
(2) Figures obtained from Standard Life where £100 net per month is uplifted to £125pm with tax reliefBack to News & Views