A Guide to Your Pension Scheme Options

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on November 1, 2018

Updated January 14, 2021

A guide to pensioners in older age

Pensions can be a tricky thing to master, particularly where there are multiple options for customers to take advantage of. Your pension is essential, and most people rely on the money that they have invested in a pension to help them live comfortably through their retirement.

While having lots of choices can be a good thing where some things are concerned, working out which pension type meets all of your requirements to ensure the level of comfort you want can be tricky. Educating yourself on the different kinds of pension means that you’re more aware of how to ensure that you are putting yourself in the best position for your retirement.

There are a lot of different options available. Here is our guide for some of the most popular pension options, so you can decide which is best for you.

Workplace Pension Schemes

Workplace pensions are pensions that are arranged by your employer and are a very efficient way of saving for your retirement. Workplace pensions are simple enough to navigate, thanks to auto-enrolment. A subscribed percentage of your pay is automatically paid into the pension scheme each month, and in most cases, your employer will contribute to your scheme at the same time.

This means that when the time comes for you to take your pension, you will have a comfortable pot ready for you to take advantage of. Workplace pensions are protected by the Pension Protection Fund, meaning that if the worst was to happen and your place of work was to go out of business, any money that you have contributed into your pension fund will still be there for you to benefit from.

Advantages of Workplace Pension Schemes

Workplace pension schemes are incredibly easy, practical pensions to be enrolled on because of the fact that, since April 2018, employers are legally obliged to register you on their pension scheme automatically.

Workplace pension schemes offer the flexibility of being able to opt out if you so wish, but also limit the amount of stress you might find yourself under when starting a new job. You no longer have to take a number of steps to join the scheme and because of the fact that it is compulsory for employers to pay into the plan as well, making it a particularly attractive pot from a financial perspective.

Disadvantages of Workplace Pension Schemes

It is possible to opt out of a workplace pension scheme, particularly if you find that the positives of the scheme don’t outweigh the disadvantages. One of the obvious weaknesses of the workplace pension schemes is that being enrolled in such a scheme automatically decreases your take-home pay each month.

There’s also always the risk that the amount of money you invest in your pension over the years may not amount to a particularly large amount when you finally decide to retire. Alternative investments may well be more attractive to you if this is the case.

Private Pension Schemes

As well as being entitled to the state pension, you may well choose to pay into a private pension scheme to further the amount of money you have for living costs when you retire. Private, or personal, pensions allow you to save up money for later on in life and could also be used to top up your workplace or state pension entitlements. You can also use private pension schemes if you are self-employed and consequently don’t have a workplace pension scheme, or else if you do not work but have the means to pay into a private pension scheme.

Another type of private pension scheme is the SIPP – a self-invested personal pension – which allows for even more versatility and freedom. SIPP plans allow their investors to use their money to buy stocks and shares and other assets, all of which will receive tax relief to an agreed limit, meaning that any money you make through these investments won’t accrue additional tax.

Advantages of Private Pension Schemes

Private pensions allow you to build around your budget – you can choose to set up regular contributions into your private pension scheme or else you can make a more substantial, one-off purchase into the fund – the pension provider will add tax relief to the contributions.

Private pensions work in the same way as other pension types – when you reach the age of retirement, you can choose to take the pot as a lump sum, use it to buy a guaranteed income annuity or else leave it in the pot and take money from it as and when you need it.

Disadvantages of Private Pension Schemes

The money you contribute to your personal pension fund will usually be invested into multiple assets such as shares, bonds and cash – this means that there is some risk involved as your money needs to be wisely invested to ensure return on investment.

Based on the amount of risk you’re willing to take, you’ll be offered a number of different pension funds to choose from. As is the case with all types of pension, your capital is at risk, and the value of the money you have invested can fluctuate up and down depending on the market at the time.

Boost your pension fund every time you receive a pay rise. If you receive a pay rise and are already in a comfortable position, put all of the extra into a pension.

State Pension

If you are of pension taking age and have contributed to National Insurance for at least ten years, you could be entitled to a state pension. At the moment, the maximum amount you could be entitled to is £164.35 per week, although this takes into consideration how much National Insurance you have paid.

You are still entitled to a state pension even if you have a workplace pension or a private pension. A State Pension is paid every four weeks, into the bank account of your choosing and is paid in arrears. Upon reaching the state pension age, you should get your first payment within five weeks. If you choose to continue working after you have reached the state pension age, you will no longer have to pay National Insurance – default retirement age is no longer a thing, and you may well be entitled to slightly more from a weekly pension because of defaulting on taking it at state pension age.

Advantages of a State Pension

State pensions

One of the main benefits of the State Pension is that most people are entitled to it, assuming that they have worked and consequently contributed to National Insurance for at least ten years. These ten years don’t have to be consecutive years, meaning that even if you have been out of work for a period of time, you could still be entitled to your State Pension.

The new ‘flat rate’ pension rises with inflation and ensures that the process remains both simple and certain when you reach retirement age.

Disadvantages of a State Pension

It’s important to note that while a flat rate figure of £164 sounds like an incredibly reasonable amount; this is actually the maximum amount you could receive and what you actually get can differ significantly. Furthermore, if you have under ten years of NI contributions, then you aren’t entitled to anything.

Never neglect your National Insurance contributions which can be easy to miss if you’re self-employed. Make sure you have at least ten years of payments for security in the future.

Anyone who receives additional state benefits could find that it is affected if they claim a State Pension, so this is something to take into consideration.

Additional Voluntary Contribution (AVC) Schemes

Additional Voluntary Contributions (AVC) are contributions that you make to your pension scheme as a means of building up a supplemental retirement fund. This scheme can be used as a method of topping up your workplace pension, with the Revenue and Customs limits.

AVC schemes could be one of two different variations. The first, a defined contribution scheme, allows you to pay additional contributions into your pension scheme. Secondly, a defined benefit AVC will enable you to buy additional months or years of membership in the defined benefit pension scheme, allowing you to enhance and increase the pension benefits, increasing the proportion of pensionable earnings when you choose to take your pension.

Advantages of AVC schemes

AVCs are a great way of boosting your tax-free lump sum, allowing you to access an additional retirement income that your workplace or personal pension would not have permitted. They also allow you to take advantage of the tax relief available to pension holders.

As you get older, the percentage amount of your income that you are allowed to invest in your pension increases. AVCs can be used as a way of substantially increasing the amount in your pot in a small amount of time. This enables you to take advantage of the tax-free cash that pensions allow for, seemingly a practical and financially beneficial preference to savings accounts.

Since significant changes to pensions were put in place, restrictions placed on AVCs that meant you couldn’t withdraw lump sums of cash from them are a thing of the past. Now, you can withdraw 25% of the pot as a tax-free lump sum. This means that AVCs carry the potential of a significant pension income.

Disadvantages of AVC schemes

While sounding simple on paper, in reality, AVCs can be particularly challenging to understand, and there are a number of rules and possibilities associated with the schemes. Taking the advice of a financial advisor is recommended to ensure you get the best possible advice, suited to your personal needs. AVCs may well not be suitable for people other than higher taxpayers looking to benefit from tax relief.

Do your sums. While inflation is bound to rise, it is essential you have an idea of your average yearly ‘income’ as a pensioner. Work backwards to find out what amount you want to retire with and how you can get there. The chances are you’ll need to up all contributions considerably.

Pension Release Schemes

Pension release, or pension unlocking, is a way of removing money from your pension pot (or pots, if you pay into more than one pension scheme) before the age of 55. Arguably the riskiest of pension plans, pension release schemes unlock tax-free cash from your pension plans.

A number of government-sponsored pension schemes could potentially be considered pension release schemes. If you find yourself in a position where you feel as though you need to access your pension and you are not at the required age of 55, then it would be strongly advised that you seek financial advice from a registered and qualified legal advisor before you attempt to release pension equity.

Advantages of Pension Release Schemes

If you are in very poor health, there may be circumstances where you are entitled to early release of your pension. Terminally ill pension holders are included in this. In this circumstance, releasing the money early will be risk-free because otherwise, you may well lose the benefits of your pension.

If you do choose to unlock your pension before you reach 55, then there may well be options provided to you that entitle you to a cash-sum, of which 25% is cash free. This tax-free sum is known as a Pension Commencement Lump Sum or PCLS.

The amount of income you receive is dependent on your marital status and whether the cash is unlocked from a personal pension or an occupational scheme. In spite of this, all pension release should be considered long and hard as once it’s done, it’s done, and the risks are high.

Disadvantages of Pension Release Schemes

There are a number of scams associated with pension release and if you do choose to release your pension through one of these schemes, then you ought to seek financial advice to make sure that you are doing it legally and haven’t opened yourself up to a scam.

Scams could involve having to pay an extortionately high tax bill after releasing your funds and end with your pension fund deposited in an overseas scheme, invested in high-risk products.

Set financial goals for key milestones in your life and consider how your short-term goals affect the long-term. You need to balance a good retirement with a comfortable way to live now and vice versa. A financial adviser can prove invaluable in setting and managing your goals and make sure you stay on track.

So there you have it, these are just some of the pension options to look into that can hopefully help you to achieve a long and happy retirement!

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