We regularly get asked the same questions by our clients. So, in case you are thinking the same, here are some of the most popular questions we get asked, along with our answers.

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A pension is a tax efficient ‘wrapper’ with the specific purpose of securing an income later in life, while an annuity is a regular income paid in exchange for a lump sum, usually the result of years of investing in an approved pension scheme. Think of a pension as the vehicle under which you accumulate the lump sum that will enable you to create an income (perhaps by way of purchasing an annuity) at or near retirement.

Pensions in the past often had to purchase annuities however this is no longer the case. In fact, it can often be advantageous not to do so, particularly since changes in the 2011 budget that allowed certain unused pension capital to be passed on, rather than lost to an insurance company or HMRC.

The vast majority of annuities are conventional and pay an income that is a guaranteed for life. The amount you receive depends on how long the annuity provider expects you to live, i.e. how many years you’ll need to be paid. Insurance companies calculate this using your age, sex, the size of your pension fund and, in some circumstances, the state of your health. As there are a range of options available at retirement it has never been more important to discuss and review the best option for you and your family before opting for the traditional method of providing an income via an annuity. Once this decision has been made, it cannot be undone.

Pension legislation is ever changing, with greater flexibility and planning opportunities than ever before. We would encourage everybody to regularly review their plans for their retirement as part of our on-going commitment to helping clients achieve their objectives in retirement.

If you have worked for several different employers and/or have been self-employed, you might have a number of different pensions and might be considering consolidating them. However it is important to find out how they are performing, if there is a penalty for transferring funds, are there guaranteed annuity or growth rates and other important areas. The decision to transfer should not be taken lightly so do talk to your financial adviser.

Small Self-Administered Schemes (SSAS) are similar to self-invested personal pension (SIPP), in that you have greater involvement in the running of your pension and you can invest in a broad range of investments, but they offer further benefits in that it may be possible to receive interest payments on your investments.

A Self-Invested Personal Pension (SIPP) is a type of personal pension that allows you to have greater involvement in the running of your pension. By being able to invest in a variety of investments means you have more options, more opportunities to choose well-performing investments and even access to your funds to invest in your own business and/or commercial property.  Permitted investments within a SIPP include stocks and shares trading on any recognised stock exchange, units in authorised unit trusts, shares in Open Ended Investment Companies (OEICs), cash accounts and freehold or leasehold interests in commercial property.

Historically, company pension schemes fell into two main categories – Defined Benefit and Defined Contributions. With Defined Benefit schemes (also called Final Salary pensions) the amount of money you got in retirement was based on how much your employer paid in and how long you worked for the company.  A defined contribution scheme is a company pension whereby the amount of money in your pension pot at retirement depends on how much you and your employer have paid into the scheme, and how well it has been invested on your behalf.

What happens to your pension pot when you die depends on a number of factors, including the age you die, if you had already started drawing your pension, the type of plan you have and if you are married or in a civil partnership. The simple answer is if you die before age 75 and have never taken any benefits from your pension, it is possible that all of your protected assets could be passed to your nominated beneficiary.  After the age of 75, it is possible that your pension assets could be passed to your nominated beneficiary minus a 55% tax charge. If you have already started taking funds from your pension when you die, what happens to the remaining funds depends on whether you had an annuity or drawdown arrangement in place. That’s why we discuss the various options with clients so they can choose the most appropriate route.

Some employers offer employees ‘salary sacrifice/exchange’ as a way of increasing pension scheme contributions. How it works is that you sacrifice part of your salary and your employer pays that amount into your pension directly rather than paying it to you. As your salary is, in effect lower, you and your employer pay less National Insurance Contributions, which can either be used to enhance the amount paid into your pension or reduce costs. However you do need to think about the implications of a receiving a lower salary if you’re considering a mortgage or life cover based on a multiple of salary. Paying less National Insurance can also affect means tested benefits such as statutory maternity pay and state pension.

There is no easy answer to this one as so much depends on your particular circumstances – your age, lifestyle, how much you have in your pension pot, whether or not you have a partner, the state of your health, your attitude to risk – to name a few. Income drawdown allows you to choose how and when you receive income from your pension fund and retain an element of control over your capital whereas an annuity is a guaranteed regular ‘income for life’.  Also, there are different income drawdown plans and annuities so you will need to discuss all of the options with your financial advisor based on your individual circumstances.

Typically, you can take up to 25% of your pension pot as a tax-free lump sum from the age of 55. Your pension provider can provide you with information on how much your pension is worth at any one time. Some former occupational based schemes have tax-free lump sums in excess of 25% and guidance should be sought from the respective provider in these instances. In some circumstances where ‘secure income’ of over £20,000 per annum can be proved it is possible to take the entire value of a pension as a lump sum, but the tax liability would normally not make this viable. It is also possible to take the entire value as a lump sum if a person’s total pension provision is below certain minimums. However, again, there would be a tax liability generated.

This is currently £40,000, however, if you have not used up the three previous years’ allowances, you can carry these forward to the current year. The annual period which is tested against the annual allowance can be manipulated and is dependent on how the relevant plans have been established. If it is likely that the annual allowance could be breached, advice should be sought.