Confused with your options?

Pensions have been around for a long time, but for most personal pensions and some workplace pensions the rules about how you can take the benefits have changed.

Rules are set out by the government in various pension acts that pass into legislation via parliament.

The government via HM Revenue and Customs (HMRC) oversees the valuable tax benefits on pension contributions.

They also control the tax you may be required to pay when your money is taken from your pension.

Pension fall into two basic types:

  • Defined Benefit (DB) schemes also known as “Final salary”.
    These employer schemes offer a regular income related to your final salary and the number of years service with the company.
    Members get an annual statement showing their income at retirement.

  • Defined Contribution (DC) schemes also known as “Personal pensions”.
    These pensions may be set up by the person making the contributions or by an employer and you’d be invited to join when working for the company.
    Members get an annual statement showing their fund value plus a retirement income estimation.

There are a few exceptions, but this is a simple guide.

Defined Benefit (DB) schemes also known as “Final salary”.

A guaranteed income for life is usually the best option for most people in retirement. However there are some rare circumstances where a transfer is a better option.

Defined Contribution (DC) schemes also known as “Personal pensions”.

Originally people with Personal Pensions were required to purchase an income by way of an “Annuity” when they retired. An “Annuity” gives a guaranteed income for life based on your age and other factors like if you wanted to extend the payment to your spouse if you died, or the payments to increase etc. Annuities are based on long term interest rates, so their value declined sharply when rates collapsed in 2008.

On 6th April 2015, the “Pension Act 2015” introduced pension freedoms. This gave personal pension holders the option to take their pension by a process called “drawdown”. Drawdown allows direct access to the pension fund as a lump sum or an income. This has quickly become the preferred way of taking the benefits from a personal pension.

For pension providers changing their pensions every time the rules change would pose too many problems, so they launch a new pension based on the new rules. This means that if your pension started before 6th April 2015 you may not have an option to “Drawdown” benefits from your pension and if you want to do so you may have to transfer it into a newer style pension that does allow drawdown.

If you want to know more, book a 30 minute consultation to talk about your options without charge…..