What is a pension?
A pension is essentially a savings plan you pay into so you have money to live off once you retire. You put money into your pension each month and once you retire you get money to live off.
There are three types of Pensions:
Your state pensions is paid out when you reach your retirement age. To qualify for your state pension you would have had to make national insurance contributions throughout your working life.
Workplace pensions as they sound are pensions your employer sets up for you.Most people will take out workplace pensions as the state pension might not be enough for you to survive once your retire.You, your employer and the Government will pay into your workplace pension. Your contributions are taken out automatically from your monthly salary.
A personal pension is one set up(you chose which fund to invest your money with) by you which you make regular payments to and when you retire you get an income by way of a drawdown or by purchasing an annuity.
Why save into a Pension?
Pensions are tax efficient and so are a good way to save for the future. Contributions are defined as gross and net. Gross contributions are those you contribute while net contributions are the tax relief added on to your contributions to boost them. This varies based on your tax band. If you are a basic rate taxpayer you will get £10 deposited into your pension for every £8 you contribute.
If you are a higher rate taxpayer you will get £10 deposited for every 36 you contribute.
If you are a nil rate tax payer you will still be eligible for the 20% tax relief.
What happens to your money?
Your contributions to your pension are invested into a pension fund based on your appetite for risk. There are lots of pension funds with different characteristics out there and you should seek independent financial advice before choosing what pension funds to invest in.
What is a Sipp?
SIPP stands for self investment personal pension. They are just as tax efficient as investing with a pension fund. SIPPs allow you to choose where your pension is invested into unlike just the few funds a particular fund manager will give you. Any income generated from your SIPP is exempt from tax. Remember tax rules are subject to change at anytime by the UK Government.
What are the costs of Pensions?
Most Pension funds are managed by Pension fund managers. They all have varying pricing but typically a pension fund manager will take a percentage of funds under management as their fee or a percentage of contributions. Some pension fund managers still take hourly or flat rate fees for managing the fund. The total cost of pension management is usually expressed as a yield deductible so this might be between 0.1 to 1%. So if your fund makes 5% yield over a year and your costs are 1% then your actual yield is 4%.
What happens when I retire?
Once you retire you can then get an income from your pension by drawing down funds( usually reserved for pension funds over £100,000) or by purchasing an annuity.
An annuity is essentially a retirement income that you buy with some or all of your pension pot.This then pays you an income per year(for a fixed period) or for the rest of your life.
Is my Pension tax efficient?
Pensions can offer up to 45% tax relief on your pension contributions and so they are definitely tax efficient.
However pension income is taxable, this means when you retire the income(funds or payout) you get from your pension are taxed.There is currently a 25% tax free lump sum available once but this can change with any change in tax laws by the Uk government.
How are Pensions taxed?
You pay tax on your pension when:
Your annual income including your pension withdrawal is over £11,850
Your annual income including your monthly pension is over £11,850
You withdraw more than 25% of your pension
When you start receiving your monthly pension and your annual income is over £11,850
The tax is automatically deducted from your pension by your pension provider when you make withdrawals.If your only pension is the state pension then you are responsible for making the tax payments via a self assessment return . However if you started getting your pension on or after April 6th 2016 then you don't need to send a return as HMRC will send you a letter informing you of how much you owe.
You may also have to pay UK tax on your pension even if you live abroad .
When you initially retire you can make a lump sum withdrawal from your pension for 25%. This amount is not taxed but anything above this amount will be income taxed.
Withdrawing large lump sums from your pension will push you into a higher tax band for the year. You are better off splitting this over the years in order to stay in a particular affordable tax band.
How much tax is charged on your pension?
The tax charged on your pension is called the income tax and this is dependent on what band of tax payer you are in e.g basic, higher etc
In the current 2018/19 tax year you will pay the following tax rate.
|Annual earnings||Type of taxpayer||Tax deducted|
|£46,350- £150,000||Higher rate||40%|
If your total private pension is more than £1.03m you will pay a tax charge on it.
What are the best pension management platforms?
There are only two Pension management platforms we feel are worthy of a mention.
Pension Bee and Nutmeg
Who are PensionBee?
PensionBee are an online Pension management platform that allow you to combine all your previous pensions into one new plan. You can view the performance of your pension on the PensionBee platform and make regular contributions through the platform.
PensionBee is pretty handy as most of us don't stick to one job throughout our lifetime, this means we have several pensions from old employers etc. This makes it pretty hard to track what fees we are being charged and how the different pensions are performing. By consolidating your pension to one this becomes incredibly easy and straightforward to manage.
Pensionbee is pretty flexible and does not charge you an exit fee to move your old Pension to PensionBee.
If anything happens to your pension such as one of the fund managers going bankrupt your money is covered 100% by the financial services compensation scheme.
What does PensionBee cost?
For pensions under £100,000 you will pay a management fee of between 0.50% to 0.95% fee based on the plan you select. Once your pension grows over £100,000 you will pay half the fee for the amount over £100,000. So e.g you currently pay 0.50% on your £100,000 Pension but you make contributions that push your pension to £150,000. For the first £100,000 you will continue to pay 0.50% and then for the £50,000 you will pay 0.25%.
What are PensbionBee’s return so far?
PensionBee has not released figures for its return so far. We will update this as soon as they are released.
Who are Nutmeg?
Nutmeg is a well known digital wealth manager which is competitive in terms of fees in comparison to the traditional wealth managers. You can manage your portfolio online, make contributions and withdraw your funds with Nutmegs investment portfolios.
A Nutmeg Pension is like all others except it is cheaper, there is more clarity in where your money has been invested and you can track the progress of your Nutmeg Pension.
Nutmeg provides a personal pension where you have to make regular monthly contributions at your discretion. Your Pension is then expertly managed for you till you retire. You are still able to receive the Governments 25% top up on your personal pension but this is subject to your tax band.
You can easily transfer your current Pension to Nutmeg at anytime and at no cost from Nutmeg.
The Nutmeg Pension has a minimum starting balance of £5,000.
What does the Nutmeg Pension cost?
There is a Nutmeg fee of between 0.35% to 0.75% including VAT. There is also an average investment fund cost of 0.19% and an average effect of market spread of 0.10%.
What are their returns so far?
You should not make financial decisions solely on past performance but as of now Nutmeg has achieved annualized returns of 7%.
Remember, this is not financial advice folks.Always seek financial advice. Past performance should not be taken as an indicator of future performances. Your investments may rise or fall in value.