How to get good guidance about using your retirement

Everyone knows that the younger you are when you start paying into a pension, the more you’ll receive when it’s time to pay out on your retirement. Nevertheless, there are still many who delay making that start and a frightening number of people who believe that their entitlement to a basic State pension will be enough to see them comfortably through old age. While they might be right about the entitlement to a State pension, they are most unlikely to find that the State pension alone will ensure anything like a comfortable retirement. But if taking care of your own pension arrangements is to be an option, where do you go for the best pension advice?

Even a cursory look at the subject of pensions will tell you that it can become a pretty complicated topic, with a bewildering range of different products, to suit different ends and purposes. For example, you might be aware that your employer runs a pension scheme and, indeed, you believe that the employer contributes to your pension on your behalf. But is this an occupational pension scheme. If it is, do you know whether it is salary-related or whether it is a defined contribution or money purchase scheme?

Alternatively, is your employer offering a stakeholder pension scheme or running a group personal pension scheme? You have heard that it is possible to set up your own stakeholder pension. How would this differ from your having your own personal pension arrangement? Is one or the other – a stakeholder or a personal pension scheme – something you should be setting up for yourself?

These are all perfectly reasonable questions, but how on earth do you go about answering them? It’s very much a specialist subject and the ground rules seem to be changing all the time. You have might also have heard, for example, that the government is introducing changes requiring all employers to offer a pension in the future and to make contributions to the schemes set up. This can be the employer’s own scheme or the government’s new central scheme that is being established.

Yet further changes will affect the minimum age at which you can start drawing your pension benefits. Subject to the rules of your particular scheme, the minimum age is currently 50, but this will go up to age 55 by the year 2010 (though you will no longer need to stop working altogether to be able to draw the pension, provided continued employment is allowed by the rules of your particular scheme). To phase in the higher age level, pension fund managers have been given the period from April 2006 until April 2010 to raise the age limit. Clearly, you will need to know when it applies to you.

All in all, therefore, it is clear that questions about pensions can become quite complicated. They are further complicated by your need to know exactly how your own individual circumstances should affect your pension options and decisions. A pension is a long-term investment, which accumulates many thousands of pounds of your hard-earned cash – it’s important, therefore, that you are guided towards the right decisions.

Given the importance of getting it right, the sensible course of action is to consult an independent financial adviser about your existing and future pension options. This will ensure that your decisions are based on the best, professional and expert, independent pension advice. In the wake of the global financial crisis, governments all over the world are struggling to make ends meet. This has led to an international decrease in pension funds, which has led many to seek pension advice from financial professionals. However, you do not have to pay an expensive fee to learn how to improve one’s future pension returns – the ‘secrets’ are accessible, generally easy to implement, and best of all free. This article will cover four ways of increasing one’s pension upon retirement.

The first, and most obvious, is salary sacrifice. A ‘legitimate’ form of tax evasion, salary sacrifice involves the purchasing of items that attract a tax rebate or are tax-deductible. This effectively decreases one’s taxable salary while keeping constant one’s ‘true’ salary. As taxable salary is also used in pension calculations, salary sacrifice can have a double benefit: both immediately, via a decrease in tax payments, and in the long-term, as increased pension payments. Each government has a different list of tax-free and tax-rebated items, so it pays to do one’s homework (quite literally). Nonetheless, almost all governments offer subsidies on educational, infant-related or green products such as textbooks and solar panels.

Secondly, one should take advantage of tax-deductible contributions to pension. This is effectively free money: one both saves up pension money for the future and receives immediate tax relief. Contributions are the obvious follow-on from salary sacrifices, as the money immediately saved through salary sacrifices can be re-invested into contributions. However, most contributions have limits and are generally only effective (as opposed to banking or investing) within higher tax brackets.

Most employers offer staff pension schemes as a way to offer more to their employees. Employers pay a portion of the employee’s salary directly into a trust pension fund, which will mature upon retirement. This is because businesses are generally taxed on the wages they pay. Staff pension schemes, which are paid directly into employees’ pension funds, mitigate this tax. Thus, while employees essentially receive free money in the form of pension, the net effect upon their salary is nil. If you are currently employed or plan to be in the future, you should consult your employer concerning the above.

Finally, another obvious – yet often overlooked – principle is to visit your respective national websites. Specifically, retirement and pension government departments often publish their practices online. When browsing through this documentation, you may find something that specifically applies to your situation, or even clarifications on how to improve your financial status in general. Moreover, these sites often offer contact details and the like – useful if applying for a special consideration scheme.

As can be seen, increasing your pension is mostly a matter of legally utilizing and maximizing your available tax benefits. Nonetheless, living comfortably requires more than an above-average pension, and the best route to a wealthy retirement is still that of saving. Pension has been likened to an investment. While it is not necessary for financial success and independence, it can very effectively support a balanced portfolio. Not attempting to increase one’s pension is the equivalent of refusing ‘free’ money. You can also top up your income with other investments by saving the maximum amount on an Individual Savings Account, buying shares, saving in other investments such as bonds or even just by investing in property.

Overall the best thing for anyone to do is begin contributing to a pension as soon as possible and as long as you know not to rely on the state pension if you want to have an enjoyable retirement.

For more information on this topic speak to your financial adviser or someone who specifies in pension advice.

Types of Pensions & Investment Schemes

Aside from the State Pension which the government offers you when you reach a stipulated age, there are other types of pensions which you can also benefit from as a UK citizen. These pensions mainly fall under two groups, personal pensions and workplace pensions.

Below is a detailed look on personal and workplace pensions. Find out what they are, how they work, and how they can benefit you in the long run.


Personal Pensions

A personal pension is a scheme that you initiate as individual. In this case, you choose the pension provider and then enter a defined contract with them. You will then start making regular payments to the pension fund and get to accrue some solid income to help you upon your retirement. Personal pensions are in most cases provided by insurance firms.

A personal pension is ideal for self-employed as well as employed persons. It can in particular benefit you if you are employed but aren’t eligible for automatic enrolment into your employer’s pension scheme. People who aren’t working at all can also enroll in a personal pension scheme, all that matters is that you be in a position make the required monetary contributions. A person can make individual contributions to the pension scheme or they can alternatively arrange with their employer to make payments on their behalf.

The contributions made to a personal pension fund are usually invested so as to accrue additional earnings over time. money is invested in various ventures including shares and stocks. The money can be invested in a number of ways including shares and stocks. An account holder is then paid the sum total upon his or her retirement.

It’s never possible to determine in advance the amount you’ll get from a personal pension fund. Your ultimate earnings depend on the amount of contributions you make and the type of investment channel you choose. All in all, you are assured of some earning from the fund upon retirement.

In regards to advantages, personal pension schemes often have the advantage of flexibility and tax relief.


Tax relief on a personal pension

As a UK taxpayer below the age of 75, the government allows you to make a tax free contribution of up to £40,000 of your yearly earnings into a pension fund. Contributions beyond this amount are still permissible but are however liable to taxation. You may be taxed up to 40% and beyond on such amounts.

If you’re not earning any income, you’re eligible for tax relief on contributions of up to £3600 in a year.

Higher rate taxpayers are eligible to claim tax relief on up to 40% of their pension contributions while additional rate taxpayers can claim up to 45% tax relief.

There is also the issue of lifetime allowance. A lifetime allowance refers to the maximum pension pot size. In a case where your pension pot exceeds the lifetime allowance, the extra amount can be taxed. You may apply for tax protection from the government so that your extra contributions become exempt from taxes.

Because clients usually make pension contributions after paying taxes, pension providers usually have the duty of claiming the tax relief a client is owed from the government. They then pay that amount to your pension fund. Your pension provider can however only claim a 20% tax relief, you will have to claim the rest on your own if you are a higher rate or an additional rate taxpayer.


Investing your personal pension fund

The choice of investment is usually left to you as an account holder. Your pension provider will provide you with a set of investment options and then leave you to make a choice from among them. The choice of an investment channel is often guided by three factors. These include:

  • The amount of money you have for investment.
  • The length of time you have left before your retirement.
  • The level of risk you are prepared to take.

It is advisable to seek guidance from an independent financial adviser before settling on a particular investment channel.

In regards to investment options, most pension providers usually offer their clients these four broad categories of investment:

  • Cash: In this kind of investment, you buy cash deposits or other investments which offer a deposit-style return. Holders of a self-invested personal pension (SIPP) account are allowed to buy actual bank accounts.

  • Bonds: These are loans to the government or private companies. They gather a given amount of interest until the loan is paid off.

  • Property: Under this investment plan, you can use your pension fund to buy shares in a company that deals in property and land. A holder of a SIPP can purchase physical buildings or land.

  • Equities: Equities refer to shares in private companies.


Risks related to the investment choices

Each investment choice carries its own unique kind of risks. A choice such as shares carries more risks because the value of shares can plummet at one point or another. Choices like cash and bonds are however viewed as more stable since you are assured of a return.

It’s important to take time and understand the risks involved with a given investment plan before settling on it. This is because a wrong choice of investment often leads to you less pension than you could have had.

You shouldn’t however be afraid to launch into deeper waters, this is because the more risky an investment is, the more the earnings it generates in the end. Some pension investments may be safe but in the end they yield very little in return.

If you start your pension pot earlier on in life, you can be able to delve into more risky investment plans as you will have more time to recover from any loss which you may incur. It is however advisable to stick to less risky investment plans if you begin saving for retirement at a later age. This will ensure that the final pension you receive isn’t reduced because of reasons such as short-term changes in stocks value and so on.

Pension providers often refer to the concept of sticking to safer investment options as ‘lifestyling’. You can resort to the option of ‘lifestyling’ if you so wish. It is in particular advisable if you are nearing retirement.

Financial advisers usually understand the specific risks involved with a given kind of pension fund investment. For this reason, you should ideally seek their help before deciding on an option.


Pension funds related to personal pensions

Aside from standard personal pension accounts, there are other two pension fund accounts which are classified under or alongside personal pensions. These include stakeholder pensions and self-invested personal pensions (SIPPs).


Stakeholder pensions

Stakeholder pensions are more of personal pensions. They have the following distinct features:

  • A stipulated minimum monthly contribution of £20. You can however contribute a higher amount than this if you wish to do so.

  • No requirement of regular contributions. It’s entirely up to the account holder to decide when and how to make contributions to the pension pot.

  • The pension provider cannot charge beyond 1.5% of the fund’s value as administration fee for the first 10 years. They also cannot charge more than 1% thereafter.

  • There aren’t any penalties if you miss or stop making payments.

  • You can change payment schemes at any given time without incurring a penalty.

A stakeholder pension account is especially suitable if you want a pension scheme which offers you high flexibility in terms of amount and interval of payment.


Self-invested personal pensions (SIPPs)

These pension schemes differ from stakeholder and standard personal pensions in that they give you the freedom not only to choose but to also manage your investment. In the case of stakeholder and standard personal pensions, your investments are usually managed for you within the fund.

Providers of SIPPs include insurance firms, pension consultants, and fund managers. You can choose a suitable pension provider from any of these.

Apart from managing your investment on your own, you can also choose a qualified and approved manager to make decisions on your behalf. You can check with the Association of Member-directed Pension Schemes (AMPS) to find an approved pension fund manager. Their website is

It’s better to only consider a SIPP if you’re an experienced investor or if you have a large amount of funds to manage. This is because SIPPs tend to be more expensive given the risks involved in managing the fund on your own.


Benefits of a personal pension fund

A personal pension fund offers the following benefits:

  • It offers you an income upon retirement. This can be offered from the age of 55 onwards. You can choose to take out the pension in a number of ways.

  • A pension amount that is payable to your widow, widower, civil partner, or any other listed dependant.

  • A lump sum that is payable to your widow, widower, civil partner, or a dependant if you die before retirement. This amount is tax free.


Pension scams

You should be careful about pension scams because they are lately on the rise. Ever since new rules permitted people to take lump sums from their pension pot, pension scam cases have been on the increase.

Be on your guard against pension providers who are only out to con you of your cash. Before signing a contract with any pension provider, ensure they are registered and approved to offer the kind of services they claim to offer. You should try and choose a well known service provider to ensure the safety of your money.


Workplace pensions

A workplace pension scheme is a retirement saving scheme whereby contributions are directly deducted from your salary. Your employer can also make contributions towards the scheme. In a case where you’re eligible for automatic enrollment into a pension scheme, your employer has to make payments to your pension pot.

There are two main kinds of workplace pensions. These include:

  • Occupational pension schemes
  • Group personal pensions or stakeholder pensions


Occupational pension schemes

Occupational pension schemes are schemes which are arranged by an employer to provide an employee with a retirement pension. They are further divided into two categories namely final salary schemes and money purchase schemes.


Final salary schemes

These pension schemes are also referred to as defined benefit schemes. In the case of a final salary scheme, your pension is directly linked to your salary. This means that your pension increases with the increase of your salary as you go on working for your employer.

The amount you get in this scheme in the end depends on two factors. These are, your salary at retirement and the number of years you have spent in your job. Your pension is not in any way dependent on the stock market’s performance or other investments.

In most cases of final salary schemes, an employee pays a given percentage of their wages towards the fund while their employer pays the remaining amount.


Money purchase schemes

A money purchase scheme is also a type of defined contribution scheme. It is also aimed at giving you a package upon retirement.

In a money purchase scheme, you make contributions which are then investment earn you additional amounts over time. The pension you are offered in the end depends on the amount you contributed and how well the fund’s investments performed.

You’ll be required to pay a given percentage of your wages into the fund. Your employer may also contribute regular amounts towards the fund but it isn’t always so. Your employer is however obliged to make regular payments towards your fund if you’ve been automatically enrolled in a workplace pension.

You should seize the opportunity and join a workplace pension scheme in a case where your employer also makes payments to the scheme. In a case where your employer doesn’t contribute to the scheme, you might want to compare different schemes in order to find one which is both affordable and suitable.


More benefits of occupational payments schemes

Aside from a retirement package, occupational payment schemes offer the following benefits:

  • A life insurance cover which gives your dependants a lump sum or pension when you die while still under employment.

  • A pension in case you’re forced to retire early because of issues of ill-health and so on.

  • Pensions to your spouse, civil partner, or dependants when you die.


Group personal pensions or stakeholder pensions

These pensions work in a similar way to personal pensions. In these case, your employer chooses a pension scheme and then you enter into an individual contract with the pension providers. You will then make contributions to the funds from your wages. These funds are further invested to grow your fund.

In this particular kind of scheme, your employer gets to choose the investment channel for your funds. Your employer may also contribute towards the fund but they aren’t obliged to do so unless otherwise.


Automatic enrollment into a workplace pension scheme

UK employers have been instructed to enroll eligible employees in a workplace pension scheme. They were required to do so between the period of October 2012 and April 2017.

You are eligible for automatic enrollment into a workplace pension scheme if you meet this conditions:

  • You work in the UK
  • You are aged 22 and below
  • You are under the stipulated State Pension age
  • You earn more than £10,000 in a year
  • You aren’t already enrolled in any workplace pension scheme

If you don’t wish to be under an automatic workplace pension scheme enrolment, you can always opt out.


Finding out about your workplace pension scheme

When you join a new workplace, it’s important to find out about the pension schemes which are available at your workplace. These are some of the things to look for:

  • Your eligibility for automatic enrolment into a workplace pension scheme
  • The type of pension scheme, is it an occupational or a workplace scheme?
  • The percentage of your wage that you’ll have to contribute towards a given scheme
  • If your employer contributes to a workplace scheme or not. Also how much they pay in case they’re contributing to the fund.
  • The channel of investment for your fund
  • How you will know about the amount that is available in your fund
  • Whether you’ll be able to join the scheme at a later date if you don’t do so immediately.


Tracking your pension scheme

You should take care to ensure that all is well in regards to your pension scheme. The amount you contribute towards the fund should be indicated on your pay slip. It should also additionally appear on your yearly P60 tax information.

In case you suspect anything out of the way with your pension fund contributions, you should inform your employer and have it sorted out as soon as possible.


Other pensions

Aside from the aforementioned pensions, there are also other types of pensions available to UK citizens. These include pensions which are given to servicemen and their families among other kinds of pension schemes.

Why have ‘contracting out’ savers ended up with less state pension?

According to recent statistics, the official number crunchers have revealed that the estimates for “contracting out” benefits for extra National insurance is incorrect. As a result, it has left many losing money.

The Government Actuary Department have previous files which clearly point out the predictions they have regarding government bonds. It also included investment returns and life expectancy. Through the analysis, it was revealed that all of these information are wrong.

The data was carefully examined by Steve Webb who is a former Pensions Minister. He is now the policy director of Royal London. He uncovered the false data while he was answering questions for his This Is Money column which is part of his regular tasks.

Webb assigned a Royal London senior actuary to analyze the paperwork he wanted to have clarified. He specifically wanted to find out if the Government’s predictions were accurate. He focused on what people who have private pension would be able to build up, having their benefit in hindsight. In this article, we clearly explain what “contracting out” means and how it impacts the forecasts of GAD.

The meaning of “contracting out” & how it affects pensions

Most people who receive a state pension forecast realize that the figure is lower than the full flat rate which was recently implemented. It is £155.65 per week since the pensioners weren’t able to give enough contributions for the National Insurance over the past few years. This is mostly due to them being “contracted out” of paying for any additional top ups for state pension. Additionally, it’s also because of underpaid NI while they were still working. As a result, the money is being given to them through the use of rebates. These rebates were part of the people’s private and work pensions which they thought would help them gain a higher rate in the end. Employees who were part of final salary pension schemes were assured a guarantee to make sure that they wouldn’t lose out. However, it wasn’t the case for employees who were in workplace or personal defined contributions. In 2016, “contracting out” was fully eliminated from final salary schemes. In 2012, the other types were eliminated first.

As of now, the Department for Work and Pensions takes away individual deductions from state pensions. This is also called the Contracted Out Pension Equivalent (COPE). It is solely based on the additional funds which it assumes the pensioners have built up using their rebates after they have been contracted out. It was the Government who decided the size of the original rebates. They based it on the estimates they have gathered from studying GAD’s documents. This is the main reason why there is still some interest in the accuracy of those documents.

What did GAD predict in their forecasting?

Neil Walton who is the senior actuary of Royal London have carefully analyzed the GAD documents. According to his findings, the documents were very technical. He found out that in order for GAD to calculate the appropriate contracting out rebates, they had to forecast what will happen in the future. It was between 1987 and 2012 when the rebates were reviewed for a total of six occasions. In each of those reviews, they had to assess three important factors which are:
1) How much investment returns the pension will achieve at the end of the entire period
2) The range of government gilts which the pension will be priced on
3) How long the pensioner will live after retirement

What was GAD’s prediction?

For investment returns, they have predicted that the money purchase pensions would be able to achieve an investment return of 1.5% per year. The real results showed that since the 1988 RPI inflation, the investment return is at 3.4% annually. Their assumed investment mix has reached 9% on average. For gilt yields, they have predicted that the retirement yield would be 3.75% each year which will then decrease to 2% in the 2000s. They expected it to come back up to 3.5% after 2017. The real results showed that since 1981, the assets real return was at 2% each year until the mid 2000s. For how long the pensioner will live after retirement, GAD used the population mortality tables which resulted in the 10 yearly censuses. In reality, longevity rates have been constantly improving over the past few decades.

What was the DWP’s calculations?

They are mainly responsible for calculating the deduction which is called the Contracted Out Pension Equivalent (COPE). It directly affects the impact of being contracted out on the person’s eventual state pension in the future. According to Waites, the COPE calculation takes into consideration a deduction accumulated within specific periods of time when the pensioner was contracted out. This means that persons who are near their state pension age, they will get less than the new full state pension. If the individual has been contracted out within a defined benefit scheme, it will be able to fill the gap. For individuals who have been contracted out while they were in a defined contribution scheme, they will come to find that their private pension will be much less than the deduction which has been take off from the starting amount. In both of these cases, if a pensioner is at least eight years from their state pension age and they continue to make National Insurance contributions, they will most likely be okay. This is because the contracting out deduction wouldn’t be able to reduce the original amount of the basic state pension.

Is there something that can be done to help these pensioners?

In his most recent column, Steve Webb said that he doesn’t believe that the Government Actuary made their assumptions willfully during the 1980s until the 1990s which would turn out wrong. However, as a result of those assumptions many people who have reached their pension age now have to lower their total pension compared to if they had remained in the state scheme. He added that as of right now the assumptions made by GAD cannot be changed easily. The taxpayers during the 1980s to the 1990s agreed to follow those assumptions because at that time it was the best guess of the Government Actuary. Taxpayers in our world today are very unlikely to become fully prepared to do good amidst the shortfall, specifically when the individual pensions’ investment weren’t as they hoped it would be.