What is a Pension Pot?
‘Pension pot’ refers to a type of pension you build up with pension contributions you and/or your employer make. You’ll have one if you have a ‘defined contribution’ pension which includes workplace, personal and stakeholder pension schemes.
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When planning your pension and retirement income you might need help with:
- choosing a personal or stakeholder pension
- planning your savings
- choosing how you want to get your retirement income
- delaying your State Pension payments (deferring)
Why save into a pension?
Pensions might seem complicated but the basic idea is a simple one. It’s worth understanding their benefits, because your State Pension – while providing a foundation – may not be enough to live on. You need to save more.
The importance of retirement savings
Did you know? The maximum basic State Pension is far below what most people say they hope to retire on. More than half of people in the UK either aren’t saving at all for their retirement or they aren’t saving nearly enough to give them the standard of living they hope for when they retire.
If you fall into this category, you have three choices. You can:
- reduce your expectations of what you’ll be able to afford in retirement
- start saving more
- retire later
Don’t rely on the State Pension to keep you going in retirement. The maximum basic State Pension of £155.65 per week (effective from 6 April 2016), and is far below what most people say they hope to retire on.
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Saving into a pension.
Once you’ve decided to start saving for retirement, you need to choose how to do so. Pensions have a number of important advantages that will make your savings grow more rapidly than might otherwise be the case.
A pension is basically a long-term savings plan with tax relief – your regular contributions are invested so that they grow throughout your career and then provide you with an income in retirement. Generally, you can access the money in your pension pot from the age of 55.
New rules for accessing your pension
In the past, once you’d taken your tax-free cash from your pension pot, you had to use the rest of the money to buy an annuity that would provide you with a guaranteed income for the rest of your life.
But new rules introduced in April 2015 mean that once you’re aged 55 or over, you can use your pension pot in any way you wish. With more freedom comes more choice and many people may want professional financial advice to help them decide what to do with their pot.
Even if you’ve never taken financial advice before, this is probably the time to do it. Unless you’re very sure about what you want to do, taking advice could be the soundest financial decision you’ll ever make.
Types of pension
From defined contribution and benefit schemes, to personal pensions and pensions for the self-employed.
- Defined contribution pension schemes
- Defined benefit pension schemes
- Personal pensions
- group personal pension
- Stakeholder pensions
- Self-invested personal pensions (SIPPs)
- Small self-administered Scheme (SSAS)
- NEST pensions
- Multi-employer pension schemes
- Pensions for the self-employed
Is transferring a pension a good idea?
If you’re thinking about transferring a current pension into a new personal pension plan or self-invested personal pension (SIPP), we’ve set out seven key questions for you to consider. But remember, whether a transfer is suitable or not will very much depend on your individual circumstances and objectives. This information can’t cover everything you’ll need to think about but it can help you to start.
Types of pension
From defined contribution and benefit schemes, to personal pensions and pensions for the self-employed.
- Defined contribution pension schemes
- Defined benefit pension schemes
- Personal pensions
- group personal pension
- Stakeholder pensions
- Self-invested personal pensions (SIPPs)
- Small self-administered Scheme (SSAS)
- NEST pensions
- Multi-employer pension schemes
- Pensions for the self-employed
Is transferring a pension a good idea?
If you’re thinking about transferring a current pension into a new personal pension plan or self-invested personal pension (SIPP), we’ve set out seven key questions for you to consider. But remember, whether a transfer is suitable or not will very much depend on your individual circumstances and objectives. This information can’t cover everything you’ll need to think about but it can help you to start.
Seven Key Pension Questions
1. Will the new pension be more expensive than my existing one?
If the new pension costs more, make sure you’re satisfied that the additional costs are for good reason. For example, if the new pension offers you access to more funds than your current pension(s), ask yourself whether you need them. You wouldn’t take out a more expensive mortgage or insurance policy without good reason, so why do it with your pension?
You’ll get information about the costs of the new pension from the pension provider or your adviser. You need to read all the documents you’re given so you can clarify any issues you’re unsure about.
2. Would a stakeholder pension meet my needs and objectives?
Stakeholder pensions can be cheaper than other personal pensions, so if you have an adviser, make sure they discuss this option with you. If your adviser doesn’t think a stakeholder pension would be suitable for you make sure you understand why.
Some stakeholder pensions now provide access to quite a wide range of funds. So even if you’re looking for some flexibility in your investment choices there may well be a stakeholder pension to suit you.
3. Is it a good idea to transfer all my pension pots into a single new one?
If you currently have several pension pots and are looking to put them into one pension pot, make sure you’re aware of any costs. If you’re taking advice your adviser should be able to explain them to you.
You may not need a new pension to put all your pension pots together. If one of your existing pensions already meets your needs and objectives it might be possible to transfer all of your other existing pensions into that one.
4. Will I lose any benefits?
It’s possible that your current pension has valuable benefits that you’d lose if you were to transfer out of it, such as additional death benefits or a Guaranteed Annuity Rate (GAR) option. A GAR option is where the insurance company will pay your pension at a particular rate, which may be much higher than the rates available in the annuity market when you retire. You don’t have to use your pension to buy an annuity, but buying an annuity is still an option so it’s important to understand the pros and cons of transferring where you have a Guaranteed Annuity Rate.
5. Are there any charges if I transfer?
Some pensions may apply a charge when you transfer out. These can be significant – sometimes several thousand pounds (depending on the size of your fund) so it’s important to check if one applies in your case.
6. Will the investments in the new pension be right for the amount of risk I’m prepared to take?
You may want to decide for yourself how to invest your money, or your adviser may make recommendations for you. Either way it’s important the investments chosen are appropriate for the amount of risk you’re prepared to take with your money – remember, investments can go up or down.
If you use an adviser they will need to be clear about what fee they will charge, whether it’s for one-off or ongoing advice – find out more below.
7. Will I need ongoing advice?
Depending on the new pension you choose it may be important for you to have ongoing reviews. Some fund selections need to be reviewed from time to time to maintain the balance of your portfolio.
It is also possible that the amount of risk you’re prepared to take could change over time, for example if your financial situation changes, or as you get nearer to retirement.
Your adviser should explain this, and whether it applies to the pension they recommend. If so they may be able to offer you an ongoing service.
Ask yourself if you have enough knowledge and experience of investment to make decisions without the need for an adviser.
Why get help?
Unless you’re in a pension scheme that pays you an income based on your salary once you retire, you’re most likely to be saving in a scheme that provides you with a sum of money (known as your pension pot). If that’s the case, you’ll have to decide how you are going to use your pension pot to provide an income when you retire. There are lots of options available, some more complex than others, but deciding which is right for you is not straightforward.
But even before you get to that stage, there are tricky questions you might need help with such as can you afford to retire? Should you bring all your pension pots together? How much will your State Pension be?
Optimate Consulting can refer you to a suitably qualified adviser to answer all these questions and review your current circumstances and see if your current pension is on track
Pension Led Funding
Why is business funding an issue?
While there are a growing number of non-bank funding options available to business owners they may not suit you and your business. Whatever the funding method, there has to be some element of guarantee to the lender. Some guarantees are more onerous than others. In almost every case, a first charge is made to secure the loan. The size of the charge can vary depending on the type of loan and other guarantees required.
Pension-led funding provides a finance option that is very different from many other sources of finance by allowing you, the business owner, to exercise a level of control over your business finances that other finance options will not give you.
What is Pension-Led Funding?
One of the most challenging issues for business owners and directors currently seeking business loans, or other forms of funding, is the ability to source the most appropriate finance without losing total control of their businesses. As a business owner you may have accumulated funds in a variety of pensions throughout your working life.
This could be through an occupational pension or some form of private scheme. Whatever the source of these funds, business owners are almost universally frustrated at the lack of performance of their pension funds and their inability to use them productively. You may be unaware that these funds can help finance your business now.
Pension Led Funding (PLF) is a financial services product offered in the United Kingdom (UK) that raises funds for businesses based upon the use of pension benefits accrued by owners or directors of the business they control. The money can then be used for the provision of a secured commercial loan, the purchase of commercial property, *the purchase of intellectual property assets, or the purchase of share capital (ordinary and redeemable preference shares).
Various corporate structures are eligible for this type of finance, including sole trader, partnership, limited liability partnership, limited company or franchise. The funding must be compliant with both financial regulations and Her Majesty’s Revenue and Customs (HMRC) prescriptions, and be planned so as to benefit both the company and the Pension Fund belonging to the business owner.
So when is Pension-led funding most useful?
While Pension-led funding is limited to the amount of pension funds available; this is really the only limitation. Whether to provide a deposit for a new franchise, finance an entire project or reorganise company finances, Pension-led funding can be utilised. Our brokers experience tells us that most business owners have accumulated pensions worth between £50,000 and £1million; however there are no upper limits to the effectiveness of Pension-led funding.
The Small Print. Optimate Consulting Ltd is an administrative hub, processing client applications on behalf of our business partners. As a result of this, we are registered with the Information Commissioner’s Office. We are not regulated by the Financial Conduct Authority (FCA). We do not promote regulated products to the public or provide any form of financial advice on investments or pensions which are regulated by the FCA we will refer you to a suitably qualified person. Should you require Financial Advice, we recommend you contact your Financial Adviser. If you do not have a Financial Adviser we recommend you search the Financial Services Register to find an authorised firm that meets your requirements. If you require assistance on the completion of an application, please feel free to contact us. Optimate Consulting Ltd is a company registered in England and Wales company no.10249349, registered address Unit 8 & 9, Parsons Court, Welbury Way, Newton Aycliffe, County Durham DL5 6