Everybody's ideas of a dream retirement are different. Whatever our goals, we all deserve the best retirement possible. Whilst our plans will be individual, planning for our retirement must begin by understanding what we have saved and knowing how to get the best from our retirement pots.
Retirement planning can be a complicated task. This can become even more confusing if you have accumulated a number of different pension pots. On average, we will work for 11 employers over our lifetimes (a quarter of us will work for over 14 employers), according to the Department for Work & Pensions. As people reach middle age, this could mean their pension savings are scattered across half a dozen or more pots. This could include private pensions, workplace schemes and state pension.
Unsurprisingly, it is quite common for pension pots to be misplaced. It is estimated that there is £400 million sitting in dormant accounts,* often because people have forgotten their pension details, can't remember if they enrolled in a pension with a previous employer or have simply lost their paperwork. If you need to track down a lost pension, the Pensions Tracing Service offer a free service to help reunite people with their lost investments.
There are various different types of pension, but most workplace pensions in the UK are either Defined Contribution (DC) or Defined Benefit (DB). It is important to know the differences between these pensions and how they work as they have vastly different options at retirement.
Defined Contribution pensions
Defined contributions schemes are by far the most popular workplace pensions that are in force today. A DC scheme builds up a pot of money to be used in retirement and has a range of options available once the individual reaches the eligible retirement age - which is 55 years old as of the time of writing.
DC schemes are generally ran by a pension company and money is invested into a range of funds with the aim of growing over the years. The size of the pension pot at retirement is based on the money the individual has paid in and the return of the investment in addition to any tax charges applied by the pension company. Retirement savings can receive a significant boost as tax relief is paid on personal contributions. The amount of tax relief is dependent on the individuals rate of income tax.
A key benefit of DC pensions is the flexible options offered to take the pension at the point of retirement, however, the size of the pension pot is linked to the performance of the underlying funds therefore there are no guarantees with regards to investment performance or regarding the size of the pension pot at retirement.
Defined Benefit pensions
Unlike the DC scheme, Defined Benefit pensions, often referred to as "final-salary" schemes, are run by the employer and guarantee the recipient an income every year in retirement. The amount received often increases with inflation and there is usually the opportunity to take a tax-free lump sum.
The calculated benefits of the DB scheme are based on the individuals earnings and number of years service. Each scheme sets its own rules and dictates the minimum retirement age, the age one can normally begin to take pension benefits. In most cases the retirement age is between 60 and 65.
Because DB schemes offer guaranteed income for life, they do not offer the same flexibility as DC schemes, however as the benefits are set in stone they are usually worth keeping. DB schemes are much more expensive for employers to operate, therefore they are far less common than they used to be, with most employers now electing for DC pensions.
Should I speak to an independent financial adviser about my pension?
When it comes to planning for retirement, seeking out financial advice from a qualified adviser is essential. Our retirement plans are as individual as we are, and it is of paramount importance that pensions are reviewed regularly to ensure they are on track to meet their objectives.
There are many differing ways to create a retirement income using the types of pensions described. An independent financial adviser will be able to help you create a retirement plan to utilise your pension in the most efficient way possible.
If you would like assistance in understanding your retirement options, or to review your retirement plan please get in touch.
Email: hello@taylorwealth.co.uk
Tel: 01245 520 001
The value of any investment will be directly linked to the performance of the underlying funds selected and may fall as well as rise. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
*New Pension Tracing Service website launched, Department for Work & Pensions, May 2016.
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