Pension Advice Needed.

shaz77_2

I am new to the field of pensions and as of yet I have not started my own pension scheme. However at work I have now the option to pay 2% of my salary into a pension, to which my employer will contribute 5%.

Is there anything I need to know about pensions before setting one up (In order to get the most from my pension). What happens to my pension if I leave the company in 6 months time?

Please excuse my ignorance as this is all new to me.

dunstonh

However at work I have now the option to pay 2% of my salary into a pension, to which my employer will contribute 5%.

FREE MONEY from the employer.

What happens to my pension if I leave the company in 6 months time?

Depends on the scheme as far as the specifics are concerned but you take it with you. You may or may not be allowed to continue paying into it but the money isnt lost and it doesnt stand still.

shaz77_2

dunstonh wrote: »

FREE MONEY from the employer.



Depends on the scheme as far as the specifics are concerned but you take it with you. You may or may not be allowed to continue paying into it but the money isnt lost and it doesnt stand still.

Thanks for your response, was there a reason why you highlighted "Free Money".

You mentioned that if I left the company I would not lose the money paid into the scheme but I may be unable to pay anymore into it, however you also indicated it would not stand still, what does this mean?

Are there any areas I need to look into before joining the pension scheme?

dasherman

Some company pensions allow you to put in more than the basic amount - in your case 2%,and in return your employer may also put in more.

Also look at AVC's - these may benefit from extra contributions from your employer aswell,and all pensions attract tax relief too.It's free money and you might aswell take it.

If you leave the company you can:-
1) Leave the money where it is and take it at retirement.
2) Transfer it to another pension with your new employer.
3) Transfer to a personal/stakeholder pension.
4) Take a refund of your contributions minus tax(if employed for less than 2 years)

A good website for all things pension is:-
http://www.pensionsadvisoryservice.org.uk/

dunstonh

Thanks for your response, was there a reason why you highlighted "Free Money".

Partly to emphasise free money as some people cannot see a good thing when it is right in front of their eyes and partly due to a thread not too long ago discussing the phrase free money.

You mentioned that if I left the company I would not lose the money paid into the scheme but I may be unable to pay anymore into it, however you also indicated it would not stand still, what does this mean?

If it a money purchase pension scheme then it uses investments and those investments will continue to grow. Money purchase schemes are easily transferred as well so you can amalgamate easily. If its a defined contribution scheme, there are no investments as the its based on your pensionable salary and years of service. However, if you leave there is an indexation built into it. Some people use the term frozen when they discuss these but its not really an accurate description. The years of service may be frozen but the pensionable salary it is based on is not.

Are there any areas I need to look into before joining the pension scheme?

Depends on the scheme. If its money purchase then it will be invested and where you invest is important. In your 20s, just 2% a year difference in the return can double your retirement income.

Also look at AVC's - these may benefit from extra contributions from your employer aswell,and all pensions attract tax relief too.It's free money and you might aswell take it.

AVCs are largely obsolete nowadays and employers no longer have to offer them and many have already closed them or are in the process of closing them. Their main benefit historically was a cheap way to invest compared to retail alternatives as well as not being able to pay into the alternatives if you had an occupational scheme. Well, those rules no longer exist and modern investments and plans have much lower charges. So, AVCs look rather restrictive nowadays compared to the alternatives. Unless their is an employer enhancement or you have access to one of the minority schemes that can enhance lump sum benefits, then there is no reason to use an AVC.

If you leave the company you can:-
1) Leave the money where it is and take it at retirement.
2) Transfer it to another pension with your new employer.
3) Transfer to a personal/stakeholder pension.
4) Take a refund of your contributions minus tax(if employed for less than 2 years)

You can also transfer to a section 32 buy out bond or a SIPP and a few other types of pensions as well. However, transfers are not always a good move. Especially with defined contribution schemes where statistically the odds are that it is better off being left where they are.

Also, the refund of contributions only applies to certain schemes and the employment time can be much less than 2 years now.

EdInvestor

shaz77 wrote: »

Is there anything I need to know about pensions before setting one up

You should be aware that you can't get any money out of a pension until you reach the age of 55.At that point you can get 25% out.You can never get the rest out - it must be used to buy an annuity ( a guaranteed income for life ) at retirement.At this point you lose the capital entirely.The annuity income is taxed. There is an alternative - you can leave the money invested and draw a taxable income from it. But you can't get the money out and nor can you leave it to your heirs.

A pension is most beneficial for people who can get free money from their employer, and are higher rate taxpayers who will pay basic rate in retirement.

shaz77_2

EdInvestor wrote: »

You should be aware that you can't get any money out of a pension until you reach the age of 55.At that point you can get 25% out.You can never get the rest out - it must be used to buy an annuity ( a guaranteed income for life ) at retirement.At this point you lose the capital entirely.The annuity income is taxed. There is an alternative - you can leave the money invested and draw a taxable income from it. But you can't get the money out and nor can you leave it to your heirs.

A pension is most beneficial for people who can get free money from their employer, and are higher rate taxpayers who will pay basic rate in retirement.

Lots for me to take in here, taking money out at 55 is fine, is the 25% that I am allowed to take out taxed?

If I wanted to buy an annuity at 55 but my pension is quite small how is this divided out? E.g. the cut off point as to how long I will be drawing a pension is obviously unknown so how is this worked out?

shaz77_2

dunstonh wrote: »

Partly to emphasise free money as some people cannot see a good thing when it is right in front of their eyes and partly due to a thread not too long ago discussing the phrase free money.



If it a money purchase pension scheme then it uses investments and those investments will continue to grow. Money purchase schemes are easily transferred as well so you can amalgamate easily. If its a defined contribution scheme, there are no investments as the its based on your pensionable salary and years of service. However, if you leave there is an indexation built into it. Some people use the term frozen when they discuss these but its not really an accurate description. The years of service may be frozen but the pensionable salary it is based on is not.



Depends on the scheme. If its money purchase then it will be invested and where you invest is important. In your 20s, just 2% a year difference in the return can double your retirement income.



AVCs are largely obsolete nowadays and employers no longer have to offer them and many have already closed them or are in the process of closing them. Their main benefit historically was a cheap way to invest compared to retail alternatives as well as not being able to pay into the alternatives if you had an occupational scheme. Well, those rules no longer exist and modern investments and plans have much lower charges. So, AVCs look rather restrictive nowadays compared to the alternatives. Unless their is an employer enhancement or you have access to one of the minority schemes that can enhance lump sum benefits, then there is no reason to use an AVC.



You can also transfer to a section 32 buy out bond or a SIPP and a few other types of pensions as well. However, transfers are not always a good move. Especially with defined contribution schemes where statistically the odds are that it is better off being left where they are.

Also, the refund of contributions only applies to certain schemes and the employment time can be much less than 2 years now.

Thanks for your good feedback, on Monday I plan to sign up for the pension plan, however I have been given an email address in the mean time to direct any questions I may have in relation to the pension scheme.

Are there any questions I need to ask before signing up? Again I apologise if my questions seem very naive.

EdInvestor

shaz77 wrote: »

Lots for me to take in here, taking money out at 55 is fine, is the 25% that I am allowed to take out taxed?

No

If I wanted to buy an annuity at 55 but my pension is quite small how is this divided out? E.g. the cut off point as to how long I will be drawing a pension is obviously unknown so how is this worked out?

The younger you are the smaller the annuity will be as the money has to last a long time. You can compare annuity rates at different ages here:

https://www.fsa.gov.uk/tables

Try putting in a fund of 100k after tax free cash and a spouse pension of 5% and index linked for inflation @RPI and see what income you will get at 55.