PENSIONs JAR
PENSIONS
Defined Benefit DB and Defined Contribution DC SIPP Pensions are the two primary form of pensions.
Defined Benefit (DB) sometimes known as Final Salary pension are gold plated pensions that are all but non-existent today. They are still available in some public sector industries and a handful of private companies. The reason why they are so few around is that they are extremely expensive to fund. The company takes all the risks and the pensions are not subject to market fluctuations.
Defined Contribution (DC) or stakeholder pensions are more common and the chances are that if you are starting your working career, you will be offered one of these. Along with your contribution, the employer also usually makes matching contributions up to a limit. You as the stakeholder take the risk on the returns of this pension plan.
We strongly recommend that you join the pension scheme as soon as you can. You will benefit in three ways:
1. You get tax benefit at your marginal tax rate
2. Employer contribution is essentially free money, do not let it go
3. By paying the pension from your salary, it becomes automatic and it becomes a habit - you will reap the rewards later.
ALLOWANCES
For most of us, the Lifetime Allowance (LTA) and the Annual Allowance (AA) will not be too applicable when we start our working lives. However, it is important to know what these limits are as the taxation if you go beyond can be punitive.
As of 2022 the LTA was £1,073,100 (as of 2023 LTA had been abolished by the Chancellor Jeremy Hunt) and the AA was £40,000 (this was increased to £60,000 by the Chancellor).
As you build your pension through the years, these limits may become more relevant. Indeed, over time these limits can further change as per rules and regulations.
MPAA (Money Purchase Annual Allowance) was also increased from £4,000 to £10,000 in the same Spring Budget of March 2023.
SIPP
The most simple way to open a Pension account is to start a Self Invested Personal Pension known as a SIPP.
Use someone like Vanguard or Fidelity to start an account.
As pensions are invested over an ultra long term time horizon, we would recommend that you choose index funds that are low cost but have good growth potential.
FTSE All Share Index, FTSE 100 Index and S&P 500 Index are all good starting funds.
Once you have set them up, over time try and increase your contributions. They will really make a difference when it is your time to retire.
PENSION OPTIONS
In the past, the only way to access pensions was to buy an annuity that paid a certain amount of money every month until death.
This sum of money could be setup so that it kept pace with inflation and also if you wanted to keep paying a portion for your surviving spouse.
Since Pension simplification, it has been possible to take the money out in different ways: 25% up front tax free cash, annuity, drawdown, UFPLS etc.
The rules around pensions are extremely complicated and initial choices and actions taken at retirement are irreversible, so this is one area that we strongly recommend that you take financial advice whatever the size of your pension pot.
Contact the Government's Money and Pensions Service for more information https://moneyandpensionsservice.org.uk/
This is also an area where scams are rampant. Take extreme care that you are talking to someone who is authorised, regulated and will not take decisions that will harm you over the long term.
STATE PENSION
Many people rely on the State Pension which is not a great idea. The UK State Pension is one of the worst in Western Europe and you really need to supplement it with your SIPP.
You will need 35 qualifying years of National Insurance contributions be become eligible to get the full state pension. However, you may get less if you have been "contracted out". This area is quite nebulous so read up on it if you get the chance.
The current amount is just under £10k per year, although this will increase if the Government honours the "Triple Lock" promise made years ago.
In summary, enrol or start a pension as soon as you're able to. Seek financial advice when you are closer to retirement and be very careful that you don't get scammed. Money lost through scams will never be recovered so please be careful.