Callisto Wealth Management Ltd
Rainford Hall
Crank Road
Rainford
St Helens
WA11 7RP

How do I save for retirement?

Outlining your retirement planning options

Different pensions you may have invested in…

Defined Benefit pension schemes

A Defined Benefit (DB) pension scheme is one where the amount paid to you is set using a formula based on how many years you’ve worked for your employer and the salary you’ve earned, rather than the value of your investments. If you work or have worked for a large employer or in the public sector, you may have a Defined Benefit pension.

DB pensions pay out a secure income for life which increases each year. They also usually pay a pension to your spouse or registered civil partner and/or your dependants when you die.

The pension income they pay is based on:

• The number of years you’ve been a member of the scheme – known as ‘pensionable service’
• Your pensionable earnings – this could be your salary at retirement (known as ‘final salary’), or salary averaged over a career (‘career average’), or some other formula
• The proportion of those earnings you receive as a pension for each year of membership – this is called the ‘accrual rate’, and some commonly used rates are 1/60th or 1/80th of your pensionable earnings for each year of pensionable service

Pension income

These schemes are run by trustees who look after the interests of the scheme’s members. Your employer contributes to the scheme and is responsible for ensuring there is enough money at the time you retire to pay your pension income.

Check your latest pension statement to get an idea of how much your pension income may be. If you haven’t got one, ask your pension administrator to send you one. Statements vary from one scheme to another, but they usually show your pension based on your current salary, how long you’ve been in the scheme and what your pension might be if you stay in the scheme until the scheme’s normal retirement age.

Retirement age

If you’ve left a DB scheme, you’ll still receive a statement every year showing how much your pension is worth. In most cases, this pension will increase by a set amount each year up until retirement age. Contact your pension administrator if you’re not receiving your annual statement.

When you take your pension, you can usually choose to take up to 25 per cent of the value of your pension as a tax-free lump sum. With most schemes, your pension income is reduced if you take this tax-free cash. The more you take, the lower your income. But some schemes, particularly public sector pension schemes, pay a tax-free lump sum automatically and in addition to the pension income.

Tax-free

Make sure you understand whether the pension shown on your statement is the amount you’ll get before or after taking a tax-free lump sum. Also, don’t forget that your actual pension income will be taxable.

Most DB schemes have a normal retirement age of 65. This is usually the age at which your employer stops paying contributions to your pension and when your pension starts to be paid.

Scheme details

If your scheme allows, you may be able to take your pension earlier (from the age of 55), but this can reduce the amount you get quite considerably. It’s possible to take your pension without retiring.

Again, depending on your scheme, you may be able to defer taking your pension, and this might mean you get a higher income when you do take it. Check with your scheme for details.

Fixed percentage

Once you pension starts to be paid, it will increase each year by a set amount – your scheme rules will tell you by how much. It will continue to be paid for life. When you die, a pension may continue to be paid to your spouse, registered civil partner and/or dependants. This is usually a fixed percentage (for example, 50 per cent) of your pension income at the date of your death.

You may be able to take your whole pension as a cash lump sum. If you do this, up to 25 per cent of the sum will be tax-free, and the rest will be subject to Income Tax. You can usually do this from age 55 or earlier if you’re seriously ill.

Workplace Pensions

Saving for your retirement that’s arranged by your employer

A workplace pension is a way of saving for your retirement that’s arranged by your employer. Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions.

As a result of automatic enrolment, millions of people now have a workplace pension. Millions of workers are being automatically enrolled into a workplace pension by their employer. Saving into a workplace pension is easy – you don’t have to do anything. Once you’re enrolled by your employer, not only will you pay into the scheme, but so will your boss, and you may also get tax relief from the Government.

Pensions can take many forms, and you may have previously been invited to join a defined contribution or personal pension by your employer.

Your employer will need to enrol you into a workplace pension scheme if you:

•Are not already in one, or they’ve not enrolling you into one
•Are aged between 22 and State Pension age
•Earn more than £10,000 a year
•Usually work in the UK

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 receive when you retire.

From 6 April 2018, the minimum contributions for the workplace pension will increase.

Date effective Employer minimin contribution Employee Contribution Total Minimum Contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 Onwards 3% 5% 8%

Both you and/or your employer may already have chosen to pay more than the minimum contributions. If your payments are greater than the increased minimum levels, you will not need to pay any more.

Personal pensions

Saving tax-efficiently for retirement

A personal pension is a type of defined contribution pension. You choose the provider and make arrangements for your contributions to be paid. If you haven’t got a workplace pension, getting a personal pension could be a good way of saving for retirement.

Your pension provider will claim tax relief at the basic rate and add it to your pension pot. If you’re a higher rate taxpayer, you’ll need to claim the additional rebate through your tax return. You also choose where you want your contributions to be invested from a range of funds offered by your provider.

Your pension pot builds up in line with the contributions you make, investment returns and tax relief. The fund is usually invested in stocks and shares, along with other investments, with the aim of growing the fund over the years before you retire. You can usually choose from a range of funds to invest in.

When you retire, the size of your pension pot when you retire will depend on:

• How much you pay into your pension pot
• How long you save for
• How much, if anything, your employer pays in
• How well your investments have performed
• What charges have been taken out of your pot by your pension providers

Following changes introduced in April 2015 you now have more choice and flexibility than ever before over how and when you can take money from your pension pot.

From the age of 55, you have the freedom to use your pension money. You can take the first 25% tax-free and the rest will count as part of your annual income, taxed at your marginal rate.

Your retirement options

You have various options when it comes to taking money from your pension pot. You can choose one or a combination of these options, some of which will affect you for the rest of your life.

Use your pension pot to buy a guaranteed income for life

An annuity is a retirement product that turns your pension pot into an income that’s paid to you for the rest of your life.

Take your whole pension pot as a taxable cash lump sum

It’s possible to take all of your pension savings as a cash lump sum, but there can be serious tax implications if you do.

Leave your money invested and make withdrawals when you need to

If you don’t need all of your pension pot right now, you can leave it invested and take money out when it suits you.

Self-Invested Personal Pensions

A tax-free wrapper in which you hold a wide range of permitted investments

Self-Invested Personal Pensions (also known as ‘SIPPs’) are being used by a rising number of private investors keen to take control of their retirement planning. First introduced in 1989, SIPPs have evolved into the favoured investment vehicle for individuals seeking more control and flexibility in their retirement planning.

SIPPs are a form of pension available to all investors who choose to invest into a private pension, but they have one distinctive element: they allow the investor to self-invest, or to take control of the pension (which is why sometimes they are referred to as ‘self-controlled’ pensions).

The SIPP itself is essentially a type of tax-free wrapper in which you hold a wide range of permitted investments, and the contribution limits, tax reliefs, eligibility and the age at which you can start drawing an income are all exactly the same as other pensions.

Favourable tax treatment associated with SIPPs may change in the future, and the value of this tax treatment to you will depend on your individual circumstances, which can also change. The only major difference between a standard personal pension and a SIPP is the self-investment element – one that creates a series of advantages for pension investors to benefit from.

Investing in a SIPP is a tax-efficient way to save for your retirement. Not only do your investments grow free from Income Tax and Capital Gains Tax, but you are also eligible for tax relief up to 45%.

Who can have a Self-Invested Personal Pension?

Just like any other kind of pension, Self-Invested Personal Pensions are designed to help you save for retirement and take an income when you reach it. Any individual who is resident in the UK under the age of 75 may make contributions to a SIPP, and in certain circumstances non-UK residents who have had UK earnings in previous years may also be eligible.

Even if you’ve already retired, you can still open a SIPP and take advantage of the extra flexibility that it gives you over your pension savings in retirement – but you may be limited by how much you can pay into it.

An individual may be a member of as many pension schemes as they wish, and contributions may be paid directly by the member, their employer and by transfer of previous pension plans.

New State Pension

New rule changes simpler than the old system

The State Pension changed on 6 April 2016. If you reach State Pension age on or after that date, you’ll get the new State Pension under the new rules.

The new State Pension is designed to be simpler than the old system, but there are some complicated changeover arrangements which you need to know about if you’ve already made contributions under the old system.

Already receiving a State Pension

If you were already reviewing a State Pension before 6 April 2016, you’ll continue to receive your State Pension under the old rules.

However, if you’re a woman born before 6 April 1953 or a man born before 6 April 1951, your State Pension will be paid under the old system. Even if you deferred your State Pension to a date after 6 April 2016, it will still be calculated under the old system.

State Pension under the old system

Women born on or after 6 April 1953 or men born on or after 6 April 1951 will receive the new State Pension. If someone has already started to build up a State Pension under the old system, this will be converted into an amount under the new State Pension.

If they hadn’t built up any State Pension by 6 April 2016, their State Pension will be completely calculated under the new rules.

Changes to the State Pensions

The earnings-related part of the old system which applied to employed people, called the ‘Additional State Pension’, is abolished.

The new State Pension is based on your National Insurance (NI) record alone. For the current tax year 2017/2018, the new State Pension is £159.55 per week. However, someone may receive more than this if they have built up entitlement to Additional State Pension under the old system – or less than this if they were ‘contracted out’ of the Additional State Pension. To be eligible for the full £159.55 per week, someone will need 35 years’ NI record.

The Chancellor announced in the Autumn Budget 2017 people covered under the new state pension will see the full level of new state pension increase from £159.55 per week to £164.35 a week.

‘Starting amount’ under the new State Pension

The new State Pension is calculated from your NI record as at 6 April 2016 and converted into a ‘starting amount’ under the new State Pension. This won’t be lower than the amount you would have received under the old system.

Under the old system, if you were employed (rather than self-employed), you paid Class 1 National Insurance which entitled you to the Basic State Pension and an Additional State Pension. The Additional State Pension was based on your earnings as well as the National Insurance contributions you had made or been credited with.

Substantial entitlement to Additional State Pension

If you had built up substantial entitlement to Additional State Pension, this might mean that you have already earned a pension under the old system which is worth more than £159.55 a week. If this applies to you, you will get the full new State Pension amount, and you’ll also keep any amount above this as a ‘protected payment’ which will increase by inflation. However, you won’t be able to build up any more State Pension after April 2016.

If your starting amount is equal to the full new State Pension you’ll receive the full new State Pension amount. You won’t be able to build up any more State Pension after April 2016.

If your starting amount is lower than the full new State Pension, this might be because you were ‘contracted out’ of the Additional State Pension. You can continue to build up your State Pension to the maximum (currently £159.55 per week) up until you reach State Pension age.

You can do this even if you already have 35 years of NI contributions or credits.

Less than 35 years of NI

• To receive the full amount, you’ll need to have 35 years’ worth of NI contributions or credits (known as ‘qualifying years’) during your working life. These don’t have to be consecutive years
• If you have less than 35 years of NI contributions or credits, you’ll receive an amount based on the number of years you have paid or been credited with NI
• If you have less than 10 years, you won’t normally qualify for any State Pension
• However, the 10-year minimum qualifying period does not apply to certain women who paid married women and widow’s reduced-rate National Insurance contributions
• If you have gained qualifying years in the European Economic Area or Switzerland (or certain bilateral countries which has a social security agreement with the UK), these can be used towards achieving the minimum qualifying period; however, the actual UK State Pension award will normally be based on just the UK qualifying years

Deferring the new State Pension

You’ll still be able to defer taking your State Pension. For each year you defer, you’ll receive just under a 5.8 per cent increase in your State Pension (compared to 10.4 per cent under the old system). You cannot take the deferred amount as a lump sum.

The new State Pension is normally based on your own NI contributions alone, but you may be able to have your State Pension worked out using different rules that could give you a higher rate if you chose to pay married women and widow’s reduced-rate NI contributions (sometimes called ‘the married woman’s stamp’).

Not enough NI record to qualify for State Pension

If you have not yet reached State Pension Age but are worried that you might not have enough NI record to qualify for State Pension (or to receive the maximum amount), you can make Class 3 National Insurance contributions. These contributions are voluntary and allow people to fill gaps in their record to improve their basic State Pension entitlement.

You should regularly request a State Pension statement so that you can see how much State Pension you’ve built up so far.

Why not pop in for a coffee and a chat about your plans and your investments. We’ll review your portfolio with you and give you a second opinion. If we think it is well-suited to your long-term goals, we’ll happily tell you so. But if we think it isn’t working as well as it should, we’ll explain why. Give us an hour and we’ll show you how to get the best out of your life and your money.

Please feel free to get in touch - enquiries@callistowealth.co.uk or phone 01744 881 421 We would love to hear from you
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