Do you wonder if Pensions are worth bothering with?
Do you not have a Pension and worry it is too late?
Are you just totally confused about the whole thing but don’t know who to ask?
Do you think it will cost loads to speak to a Financial Advisor and ask for advice?
Pensions and financial security for our retirement are a constant stress and worry for people. It comes up a lot during treatments. It is for this reason that we invited financial advisor Amy Goodall-Smith along for an interview to answer the commonly asked questions and worries.
This interview covers the state pension and information about private pensions for all of us whether we are employed, self-employed or have been both.
A Bit About Amy Goodall Smith
Amy Goodall Smith
MSc in Finance, Fellow & Chartered Financial Planner
Amy has worked in the financial services industry for over 20 years and brings a truly holistic approach, based on her clients’ unique needs and values.
She works together with her clients to establish their ‘why’, the legacy they want to create and help them develop a personalised, long-term strategy.
Amy’s philosophy focuses on maintaining a long-term and trusted relationship with her clients. This relies upon providing a service of distinct quality and integrity, free from any unnecessary jargon which in turn provides her clients with confidence and peace of mind.
Information in this video is accurate as of the time of filming (January 2022)
We recommend getting advice from a financial advisor before deciding to act on any of the information discussed in this section. Every person’s situation and needs are unique and need to be considered as such to ensure the best plan for your requirements.
State Pension
Every year you work, you pay National Insurance contributions which go towards your state pension that you will be able to claim once you have reached the state Pension age. Currently, this is after you have worked for 35 years and is currently just around £9,340 a year.
If you haven’t worked for that full-time period there are situations where you can accrue credits these include:
- Looking after your children.
- You’re unable to work due to illness.
- Unemployed and claiming benefits.
- When you’re caring for someone.
If you would like to find out your retirement age and records for your State Pension, then follow this link to find out:
https://www.gov.uk/state-pension-age
The date can change depending on how old you are. It is getting later from 65 to 68. Again it is worth checking as the retirement age will depend on when you were born.
If you have missing years it is worth seeking advice rather than just paying to top up. There are circumstances where the cost isn’t worth the benefit.
Different Types of Pension
Defined Benefit.
As the name suggests it means that what you are going to receive has been defined. These are also known as final salary pensions.
This is where you’ve worked for a company and they said you’re going to have this pension and we promise to pay you a percentage of your annual salary or your average salary for the rest of your life. They work it out on, how many years you worked there, what was your salary etc and then an actuarial calculation.
So it’s a percentage of your salary that they are promising to pay you and they will pay that for the rest of your life.
On your death, if you are married, it will pay your spouse 50% of that salary if you don’t have a spouse, it dies with you. If your Children are beyond this dependent age which is normally about 23, it doesn’t pay out to your Children.
Defined Contribution
This is known as a money purchase or a defined contribution. You know how much you can pay in, but you don’t know what you’re going to get out. So, you know the defined contribution, what you’re paying in, this is now what most people have. Final salary or defined benefit pensions are quite rare now.
You build up a pot of money and then act 55 or beyond, you can access that money and there are different ways you can access it. Either as a monthly ‘salary’ or you can take out what you want when you need it.
If You Have Multiple Pensions
If you are employed on average due to moving to different companies, you can have 6-7 different smaller pensions. You may now remember if you had money being paid into a pension with a job in the past. A financial advisor can help to investigate and track them down if they exist.
Amy mentioned times when she has worked with a client who is sure they don’t have a pension linked to a particular job only to discover that there was.
If you have several smaller pensions, they may all have different charging structures, fund managers, risk profiles and different growth rates. So, it can be worth consolidating them into one pot. By doing this you will be able to compound the growth and it will make it a lot easier to manage when you need to draw the money down when you retire.
It can be really difficult to assess on your own as it can be a lot to keep tabs on and the company you work for will have made the decision on your behalf with regard to the fund and there won’t necessarily be any guidance with it. Often because you are not contributing directly you don’t know how much is in there.
Do You Have To Wait Until You Are Retired To Consolidate?
No, the sooner you do it the better. If you are paying into a work pension you may find that it is growing at a lower rate, over the years this will mount up and can make a difference to the amount of pension savings you have.
Seek the advice of a professional rather than trying to consolidate your pensions yourself, because valuable benefits can be sewn up within a particular pension.
Amy recounted a story regarding a client who is a 45% taxpayer, who had missed out on 25% of tax relief that he could have been reclaiming for a ten-year period.
When You Take Your Pension.
When you take your pension, you are allowed to take 25% of your pot, so a quarter of your pot can come out without any tax, it’s called a tax-free lump sum. Some old pensions have a much greater value that is tax-free. Amy has seen as much as 49% tax-free.
You do need to take into account your future needs, so the best strategy is worth being discussed with your financial advisor
I asked Amy "Is there ever a time that it is too late to pay into a pension?"
If you haven’t seen the interview/read the article about the Money Pyramid it is worth reviewing that information first. As there are circumstances when you need to have your foundations in place first. Otherwise, Amy says there is never an age not to put money into a pension.
Yes, the sooner you start paying in the more time you have for it to grow and compound. However, when you pay into a pension the government gives you the tax back at the rate that you pay. So that will be 20%, 40% or 45% depending on your salary. So, you can see how your long-term savings will earn you much more than being in a bank.
It is never too late to pay into a pension. Amy has had clients in their 50s who don’t have a pension. You would still have 10-15 years plus of paying in and being able to take advantage of the tax credit and growth on the amount that you save over this time period.
Amy also mentioned some clever tips on how you can re-distribute your money if you have too much during retirement.
Some grandparents have surplus income in retirement that they don’t need. What they can do is pay that into the grandchildren’s pension. So you can have a pension when you’re born? The government will top you up with tax even if they haven’t paid it. So you can pay £2,880 per year into a pension if you are a non-earner.
Amy gave the example of her 11-year-old daughter. I can pay £2,880 into a pension. The government will top that up by 20%. So she will end up with £3,600 in a pension. Taking into account that retirement ages will be much higher for the younger generations what an amazing head start if you have the spare cash to do it.
If you were able to save £2,880 a year from birth to 18 and never paid into that pot again by the time that child retired, they would have £1,000,000 in their retirement pot purely from compounding growth. I found this revelation incredible.
If You Own A Limited Company.
If you are a self-employed person, you have a limited company, you can take money out and pay the tax on it then put it into a pension, then get the tax back.
Or you don’t have to use your earnings allowances and take more money out. If you pay your pension from your company, it’s a gross contribution. So you could take £20,000 out of your company and pay into a pension. £20,000 goes into your pension with no taxes deducted in any way.
Now the only thing to be mindful of is if you have an annual allowance that you can pay into your pension. You’re allowed to pay in £40,000 a year from your business. If f you pay it personally (post-tax) you can only pay in the equivalent of your salary.
The other benefit of doing it that way is you don’t pay corporation tax on that £20,000, because it’s classed as a business expense, so you get to reduce your profit by making a pension contribution, and therefore you pay less corporation tax and that’s particularly important as it can mean a 19% saving.
So if you have extra profit that you’re not setting aside for investments within your business paying it directly into your pension could be a smart option. As an example if you had £20,000 excess that would be a £4,000 saving in corporation tax. It is important to make sure that you have sufficient cash flow funds still available within your business.
So if like many business owners, we take about £8,000 in salary and the rest in dividends, you’re capped at that £8,000 because that’s known as your net relevant earnings or relevant earnings.
If you were employed and earned for example £30,000 a year. You can only pay up to my earnings and so I can only pay £30,00.
However, if you have had a pension in the past that might be £100 from 20 years ago. It doesn’t matter. You have a pension, you have had a pension. The government allow you to look back over the last three tax years and see if you have any headroom in your allowance that you haven’t used and put that in.
So if I’m a business owner who had a pension from many years ago, you’ve spent many years building your business up and so not paid into a pension. Then you can pay in that year’s allowance plus the last three years. If you do that directly from your business then it will be deducted from your profit and your corporation tax liability.
If You Are A Self-Employed - Sole Trader or Partnership
If you pay into a pension directly then this just reduces your profit for the year so that you pay less tax/just pay tax on the amount you paid yourself directly as a salary.
How Do You Decide How Much To Pay Into Your Pension?
Amy referred us back to the money pyramid. It is important to make sure you have enough money in your medium and short-term savings first. They work out what you can comfortably afford to pay into your pension that you will then be able to access from 55. The longer you commit the money for the better.
Whether you have paid into your pension via your business it is entirely yours. It is not owned by the company.
How Do You Work Out How Much You Need In Your Pension?
Amy would do an analysis of what you’ve got at the moment, taking into account your state pension and what is needed to plug the gap.
She was also candid in that it might be that you need to pay £1,000 a month to achieve the goal you want. So perhaps you may need to modify your goal. What is important is that the amount you pay in is affordable for you and your lifestyle. It is all budget driven. If your situation changes and you can pay in more at a later date, then you have the flexibility to do that.
It is important to remember that at the point that you retire, you will have paid off the mortgage and your expenses may well be lower e.g. discounted council tax, bus pass, reduction in gas and electricity etc.
You would take your expenditure now and what it would likely be in retirement. You then multiply that figure by 20.
As an example, if you have determined that you will need £30,000 a year then you would need £600,000 saved up in your pension pot. If this was to be your only income source.
Another alternative is that you keep your pension invested and just draw down the interest but at a lower rate than the pension is earning.
So, if you had a pension pot of £200,000 which was earning 6% growth if you drew down 5% that would be £10,000 salary and your pension capital is also slowly growing. If you add that to your state pension, then that at the current rate would be an annual income of around £19,000 a year.
Withdrawing Your Money From Your Pension Pot.
You can take an initial lump sum. It is worth seeking advice on whether this is the best option for you long term, as tempting as it may be to have a large lump sum.
Annuity
This is when you go to a provider and you say, here’s my lump sum, how much can you give me for the rest of my life? They do a calculation and they specify how much they will give you every year which will then dies with you.
There can sometimes otherwise be some defined benefits but generally, these days they are very bad value, you don’t get a lot of income for your money so most people do not take that option anymore. This was the only option in the past.
Draw Down
This is when you have your pension pot and you draw down (withdraw) what you want when you need it.
So, if you are slowly reducing your work hours and your income you could then top this up from your pension and increase the amount as you reach full retirement.
Then you can use the method previously described where you withdraw a percentage and leave the capital in there. This a really sensible option. If you had £300,000 and there was 7% growth and you withdrew 5% you would still have your initial pot + an extra 2% with an income of £15,000. If you withdrew £15,000 plus the interest earned you would be depleting your capital each year so could be faced with no money in 15-20 years. If you withdrew from your pension from 55 you wouldn’t be very old before you ran out….
Normally you will need more income in the ‘go, go’ years which are 65-75 years when you will spend more money. Then this will slow down 75-85 years and beyond. This is taking the assumption that you’re not paying for a care home which is not a subject being covered here.
Do You Pay Tax On Your Pension Income?
This will depend on how much you withdraw. It is taxable earnings so if you draw an amount that goes beyond the tax threshold in that year, then yes you will pay tax at the relevant rate
Can Someone Inherit Your Pension?
Often we think these things are only relevant in old age however what if something were to happen and you ended up in hospital? What if you went overseas for a long period of time? Who would look after your post or banking matters if there was something coming up?
You can instruct your pension provider through what is known as an expression of wish who you would like to receive your pension in the event of your death. This is something that does change with time.
Amy mentioned that 6 months ago she would have advised people to put into a trust 6 months ago but the trust rules have since changed, so it is best to check what is currently the best and most tax-efficient advice
It is always best to have this also written within your will.
Amy would do an analysis of what you’ve got at the moment, taking into account your state pension and what is needed to plug the gap.
She was also candid in that it might be that you need to pay £1,000 a month to achieve the goal you want. So perhaps you may need to modify your goal. What is important is that the amount you pay in is affordable for you and your lifestyle. It is all budget driven. If your situation changes and you can pay in more at a later date. Then you have the flexibility to do that.
If you take this annuity option or the final salary option, there isn’t anything to pass down generally, other than 50% of your income. So, if you have a pot like the £300,000 we talked about, and you have just been taking the growth, then you still have a pot valued at £300,000, that can pass to your spouse or it can pass to your Children, so they inherit your pension pot.
If you would like any more information about Pensions:
Amy mentioned that it is common to watch and read about pensions and think you’ve got it, then someone will ask you a question and you’ll think “Oh I thought I had it, but I don’t know”. So if you have any questions feel free to get in touch with her directly. She’s happy to help.
She can be contacted through her website
