Not as difficult as we thought

Pension Rules - old & new

When you have worked hard all of your life, saving the money you will need for use in your retirement, your pension is a critical consideration – its value and the way you choose to use the savings are likely to determine just what kind of life you are able to enjoy once you have retired.

How do the new pension rules affect me?

In addition to the changes to the retirement age, there are also changes to the pension schemes themselves – through the application of “new rules” and “old rules”:

Old Rules

  • the old rules apply to men born before the 6th of April 1951 and women born before the 6th of April 1953;
  • to qualify for the full state pension (currently £119.30 a week), you need to have reached the respective state retirement ages for men and women and have at least 30 qualifying years in which you paid National Insurance contributions;
  • men born before 1945 and women born before 1950 need to have made more qualifying National Insurance contributions – 44 years and 39 years respectively for men and women to receive the full state pension;
  • “top ups” may be available for those who do not qualify for the basic state pension or for less than the full amount, based on contributions made by their spouse or civil partner;
  • you do not receive a state pension automatically, you have to apply for it;

New Rules

  • the new rules apply to men born on or after the 6th of April 1951 and women born on or after the 6th of April 1953;
  • the principal changes under the new rules concern qualifying years of National Insurance contributions and the calculation of how much pension you receive;
  • you need to have made at least 10 years of qualifying contributions;
  • the full state pension under the new rules is £155.65 a week, and how much you get depends on your record of National Insurance contributions;
  • calculation of the exact amount to which you are entitled is complicated and you might want to refer to the official pensions website for further details.

Determining how much state pension you might receive after retirement is difficult, but you can get a State Pension Statement which shows how many qualifying years you have paid in National Insurance contributions and a forecast of how much you are likely to get.

You may apply for your pension up to four months before it becomes payable.

Please note that this information is correct as at February 2017

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Is an Annuity right for you?

An annuity is essentially an insurance product which allows you to convert the savings that have accumulated in your pension pot into a regular, guaranteed income which is payable for the rest of your life – explains a guide published by the Consumers’ Association’s Which Magazine:

  • different annuity providers offer different rates of return, so the amount of income you receive depends on the offered rate;
  • the risk taken by the annuity provider is on how long you live – the longer that is, of course, the more the provider ends up having to pay until your death;
  • by the same token, if you are suffering from a serious, life-threatening illness or condition, the provider is likely to pay less overall, so you may earn an enhanced rate of return on your savings;
  • as explained in more detail in our guide to pension annuities, the rules were changed in April 2015;
  • before that date, a minimum of 75% of your pension pot had to be invested in the purchase of an annuity;
  • since April 2015, you have still had the choice of purchasing an annuity, but now you also have the option of immediately withdrawing the whole of your pension savings or withdrawing the amount in stages (in which case, income tax is payable on 75% of your savings), or choosing a combination of withdrawing part and using the remainder for the purchase of an annuity.

Further reading: Visit our Annuities section and use our free annuity calculator to see how much you can boost your pension income.

Please note that this information is correct as at February 2017

Visit Annuity Section

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Workplace Pensions

A workplace pension provides a way for you to save for your retirement by making contributions to your pension pot each month. You might also see it described as an occupational, works, company or work-based pension.

A workplace pension is separate from and received in addition to any State Pension for which you qualify:

  • an outline of the typical workplace pension scheme is given on the official government website;
  • in addition to your own contributions, your employer may also choose to make a contribution too;
  • all contributions are deducted automatically from your pay and the amount typically represents a percentage of what you earn – the exact percentage varying from one workplace pension scheme to another;
  • if you have been automatically enrolled into your workplace pension scheme, or voluntarily opted in, there are nevertheless certain minimum contributions – made by yourself and your employer – which need to be made from your “qualifying earnings”;
  • currently (as at February 2017), the percentages are a minimum of 0.8% of your pay on your own part, 1% to be contributed by your employer and a further 0.2% from the government (in the form of income tax relief);
  • these are set to be increased with effect from April 2019 – to a minimum of 4% of your salary to be paid by you, 3% paid by your employer and a further 1% paid by the government;
  • your contributions are deducted automatically by your employer, before tax – so that you don’t pay any tax on your pension contributions – and your payslips show you how much has been deducted, plus the tax relief you have earned;
  • your workplace pension provider must send you a statement each year showing how much is in your pension pot – as reflected in the total contributions paid in by you, your employer and the government;
  • you may also request an estimate of what your pension pot is likely to be worth when you come to make withdrawals.

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Is a SIPP a good idea?

The acronym SIPP stands for Self-Invested Personal Pension and this may be a useful way of saving for the day you retire by investing in a scheme intended to help your money to grow – in a fund over which you maintain full control.

SIPPs work like this:

  • as with other forms of personal pensions, you contribute a regular sum of money to store up against the time you plan to retire – although the pension provider may also allow you to make one-off lump sum payments into your SIPP;
  • in the case of a SIPP, your pension contributions may be used to invest in a wide range of financial products, such as stocks and shares (listed and unlisted), unit trusts, investment trusts and property and land insurance bonds;
  • when it comes to drawing your pension, the funds available are dependent upon the amount you have paid in by way of contributions, the growth in the value of investments made on your behalf by the pension provider and the charges that are made for the management of your pension fund;
  • one of the advantages of a SIPP over, say, a workplace pension scheme is that it is entirely flexible and portable – if you change jobs, your SIPP is entirely unaffected, since you may take it with you and continue to make your agreed contributions as usual;
  • it is your personal pension plan, and although there is no obligation to do so, your employer may decide to contribute to the SIPP you have set up – one of the employer’s conditions may be that you “match” the amount of contributions being made;
  • although you don’t need to have stopped work or retired in order to withdraw the benefits from your SIPP, current rules mean that you must be at least 55 years of age;

If you want to find out more about SIPPs, a user-friendly guide is published by the government-sponsored Pensions Advisory Service.

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Pre-retirement Planning

With life expectancy in the UK rising year on year, it is not unreasonable to look forward to a retirement that is almost as long as the time you spent at work.

Retirement is likely to be such change to your lifestyle and circumstances that the sooner you begin the prepare for it, the better your chances of enjoying the retirement you dreamt about and deserve.

To help you start that preparation, we have addressed a number of points relating to this period of pre-retirement:

Can I afford to retire?

In the past, you might not have had much choice in the matter – you stopped work when you reached the age of 65, whether you could afford to or not.

With the removal of a statutory retirement age, employers who are entirely content to employ older workers and a proliferation of different sources of workplace and personal pensions – the choice is very much your own.

Please visit our section on Pensions for more information.

But can you afford to retire whenever you choose?

the longer your retirement, the more money you are going to need – for a longer period of time;

  • people often underestimate the length of time they still have to live – and the number of years in which their retirement therefore needs to be funded;

  • how much money you need of course depends on how much you spend, and this varies from one person’s lifestyle choices to another’s;

  • you no longer have the expenses associated with getting to and from work, but the extra amount of time you spend at home, taking holidays, or following new hobbies and pursuits may increase your household and recreational expenses;

  • working part-time might help to stretch out the funds you have available;

  • apart from any income you continue to earn, though, your retirement is likely to be funded by the pension schemes to which you contributed during your working life – National Insurance contributions for your State Pension, plus the proceeds of workplace and personal pension schemes;

  • before you are able to decide whether you can afford retire, therefore, you need to know the amounts in each of your pension pots;

  • as important as the immediate value of each of your pension pots is the way in which the amount available over the longer term is affected by just how much you choose to withdraw and when;

  • the rules on pension schemes today are generally designed so that you may use those funds as flexibility as you choose.


Stages of planning retirement

Planning when to retire – and whether you can afford to do so – needs to take into account the journey you are making through life in retirement and the changing spending habits that accompany those changes.

In order to understand those changes, some sources – including a story in the Daily Telegraph newspaper – identify three basic retirement stages:

Active retirement

  • there is little doubt that retirement gives many people a new lease of life;

  • the time has come when you are free to do all of those things you always wanted to do, but never had the time squeezing it in with work;

  • in this first stage of retirement, you may be blessed with good health and sufficient energy to try lots of new things;

  • that might include travelling to see more of the world, taking up new sports, hobbies and interests, involving yourself in charity work, writing that novel that is said to be inside all of us, or simply spending longer times with family and friends;

  • this is a period of such active retirement that you might even decide to be your own boss for once and start up a new business;

  • the earlier the age at which you retire, of course, the longer this first stage of retirement might be;

  • even so, your money is being used to support an active lifestyle, and you need to keep in mind the need to marshal your resources as you gradually move into the next stage of retirement;

Passive retirement

  • after 10 to 15 years of your new lease on life, however, things might begin to slow down;

  • depending on your outlook, attitudes and general disposition, you may no longer have the patience or energy to maintain a life that was quite so active;

  • this might be because your general state of health is beginning to fail or because the money you once enjoyed from your pension pots no longer seems to go around quite so far – unless you have managed to protect your retirement savings from the inevitable effects of inflation;

  • although a more sedentary lifestyle might mean that you are spending less money, inflation may also be eating into the spending power of your income from pensions;

Supported retirement

  • the age at which you move into this final stage of retirement of course varies widely from one individual to another;

  • it is a time marked by a noticeable decline in health and encroaching infirmity;

  • as your health begins to decline, you might need more support at home, including additional domestic or nursing care;

  • as time goes on, that supported living might mean your moving into sheltered housing or a nursing home;

  • unfortunately, it may also be a time of increasing financial pressure as the pension on which you were previously living quite comfortably, is now being stretched to its limits by the costs of the care you need – or may simply not be enough;

  • preparing for these financial strains is something best done during your pre-retirement planning, when a dependable savings strategy may now start to pay dividends.


Saving for retirement

However you choose to spend your retirement and however quickly you progress through the notional “three stages”, you continue to need money to live on and to support your lifestyle at any particular point in time.

Saving for the day you no longer have a regular income from work, but must rely on some form of savings to see you through a full and enjoyable retirement – and sooner you start making provision for those savings the better.

Saving for your retirement is an essential part of pre-retirement planning – and is likely to begin as early as your 20s or when you start work:

In your 20s

  • retirement is likely to be the last thing on your mind when you first start work;
  • but the sooner you join a pension scheme, the more your savings are going to grow;
  • the initiative is yours, since you are unlikely to be able to survive for long on whatever basic State Pension is available when you finally retire;
  • many employers operate an “auto-enrolment” scheme as part of your remuneration package and entry into the workplace pension – a saving scheme into which your own contributions are also joined by contributions from your employer and even the government (by way of tax relief on those contributions);
  • so, do not be tempted to opt out of any auto-enrolment that is offered without seeking independent financial advice;

In your 30s

  • you want to buy your own home, get married and have children – and that all costs money;
  • despite the temptations, now is not the time to drop contributions to your pension scheme or other forms of long-term saving you have arranged

​In your 40s

  • there are only 20 or so years to go until your retirement;
  • if you are lucky enough to have a final pension scheme, stay in it;
  • if you paid off your mortgage now, the money you save might be used to create your own Self-Invested Personal Pension (SIPP);

In your 50s

  • this is the decade (age 55) in which you are legally entitled to withdraw a personal pension;
  • but remember that the State Pension retirement age is rising all of the time, so those benefits might be longer in coming that you expected;
  • there is less time now for your current pension fund to grow, but you might consider increasing your contributions to it if your salary and circumstances allow;

In your 60s

  • this is likely to be the time for conserving and managing pension income so that it stretches long into the future of the retirement you have earned;
  • remember that you don’t have to withdraw all of your pension savings when you retire or take them all in one go;
  • there may be good reasons for delaying any purchase of an annuity, for example, until you are certain you are receiving a competitive return;
  • manage your debts, to ensure that servicing them is not an unnecessary expense, and when you qualify for your State Pension, remember that you may be liable for income tax on that too.

Retirement Checklist

Pre-retirement is the time for planning what happens during your retirement – not only what you propose to do, but more importantly perhaps, how you are going to finance your lifestyle when there is no longer a steady income from work.

To help you make the best use of that pre-retirement planning window, here is a brief checklist of the issues you might want to address:

Your income

  • find out how much your pension or pensions are worth;
  • the State Pension depends on the number of contributions you have made and the maximum amount payable currently stands at £155.60 a week (as at February 2017);;
  • income from any final salary pension scheme is also relatively easy to calculate;
  • you will have received an annual statement on the value of any defined contribution pension, but write to ask what you are likely to get when you retire;
  • use the free, online Pension Tracing Service to help track down the details of any pension providers you might have lost contact with and read our lost pensions section;
  • check whether you have other savings accounts or investments generating an income when you retire;

Pension fund investments

  • where your pension pot is currently invested with the prospect of enjoying growth, make sure that you are comfortable with the risks and spread of such investments, switching to lower-risk ones as your retirement date draws near;

Increasing the value of your pension

  • as time rolls on, your options become more limited – but you might consider making additional contributions into the scheme whilst you are still able to do so and/or delaying the date on which you start to use and withdraw funds from your pension pot;

Your budget

  • when you have determined the income you are likely to receive, the other part of the equation is to budget carefully for the expenditure you are likely to have – bearing in mind that your need to spend money may fluctuate quite widely during the course of your retirement;

Debt

  • whatever age you decide to retire, you might want to aim to be as free of debt as your circumstances allow – your income is almost certain to be reduced after your retirement and the cost of servicing your debts therefore become disproportionately more onerous;
  • a report by the Mirror newspaper estimated that in 2016, the average person owed some £34,000 in debts on the date of their retirement – comprising outstanding mortgages, loans, credit card balances and overdrafts;
  • paying off your debts might require a careful balance between the relative advantages and disadvantages in using any lump-sum pension payment or instead repaying any debts from your pension income;

When and how to take your pension benefits

  • you generally need to be at least 55 years of age before you are able to withdraw your pension funds;
  • but this is the minimum age and your pension provider may allow the funds to continue to grow in value and for the size of your pension pot to increase if you delay any withdrawal of finds – also giving you the advantage of enjoying those pension benefits over a shorter overall period of retirement;
  • under the new pension rules, there are many ways and forms in which you may choose to withdraw the funds, although it is important to remember that you have an income tax liability on all your pension earnings, including your State Pension.

Retirement Age & State Pensions

At what age is it possible to retire and receive my state pension?

Since the early years of the National Insurance scheme in the UK, the retirement age was 65 for men and 60 for women. This was also known as the statutory retirement age and many employers used it as the “default” age at which an employee could be forced to retire. There is no longer such a default retirement age.

  • If you remain in employment, the age at which you retire is a matter between you and your employer
  • If you have a workplace or occupational pension scheme the age at which those benefits become payable also vary from one scheme to another.

The state retirement age – the age at which you qualify for receipt of a state pension – is used by many as a general yardstick for determining when to retire.

Lengthening life expectation has made it increasingly difficult for the National Insurance scheme in the UK to remain financially viable. In response, the government has announced a number of changes to the 65 years for men and 60 years for women that previously held sway for so long.

As the Daily Mail’s This is Money pages explained in an article dated the 4th of January 2017, one of the first steps by government was to gradually bring the retirement age for women in line with that of men. These changes are being phased in until their completion in November 2018 – with a woman’s precise state pension age being determined by the month in which they were born.

After the retirement age for women has risen to 65 (in line with men) by November 2018, further changes are already set to be made to the retirement age for both men and women:

  • between October 2018 and October 2020, state pension age is set to rise to 66 for both men and women;
  • between 2026 and 2028 it will again rise to 67 years; and
  • further changes in state retirement age may be made in response to changes in life expectancy.

At its very simplest, the 65 years of age for men and 60 years for women is no longer the automatic cut off point and end of anyone’s working life.

You can read more about the new Pension rules here (this will link to copy within Pensions section)

Living longer in Retirementwhen can i retire

The statistics speak for themselves. We are all living that much longer.

According to the latest figures released by the Office of National Statistics (ONS) in Britain the life expectancy at birth is 79.1 years for men and 82.8 years. This is a considerable increase on the

figures at the beginning of the 20th century when life expectancy was a mere 45 for men and 49 for women.

 More startling, perhaps, is the projection made in a recent paper by the Royal Geographical Society, entitled 21st Century Challenges, that one in every three children born in the year 2013 is expected to live until they are 100 years old or more.

 As a result, we may be reaching – and in some cases, have already reached – a situation in which people spend a greater proportion of their lives in retirement than they do at work.

 This sea of change in the work life balance clearly has far reaching implications, not least for our whole concept of retirement, how to prepare for it and how to live it.

 Included in those implications are some fundamental questions you might want to address, such as:

  •  at what age is it possible to retire and receive my state pension (occupational pension schemes already have many different retirement ages);
  •  what is my income likely to be upon retirement;
  •  will I be able to retire at all – or have to postpone your preferred retirement date;
  •  what financial planning is necessary in order to prepare for my retirement;
  •  how am I and my relatives going to fund the costs of my eventual funeral; and
  •  what, if any, scope is left over pursuing favourite hobbies and pastimes – or simply living the life I have earned in retirement.

 These are all questions that bear closer examination – so let’s see what financial help may be available from the state, in return for the National Insurance contributions you have been paying throughout your working life.

Disability Living Allowance

Although we may be living longer, the chances of a disabling medical condition remain present throughout many retirement years.

Limited assistance is available if you are disabled and these are designed to help towards meeting the additional living expenses you face because of your disability.

Previously, this has taken the form of Disability Living Allowance (DLA), but this is being phased out, to be replaced by a Personal Independence Payment (PIP), and it is this for which new claimants need to apply.

If you are already in receipt of DLA, and were born on or before the 8th of April 1948, payments will continue to be made for as long as you need them. If you were under 65 years of age on the 8th of April 2013, you will be reassessed for the new PIP when DLA is finally withdrawn in 2018. Personal Independence Payments, however, are not available for those aged over 65, who might instead qualify for an Attendance Allowance.

Disability Living Allowance (DLA) – rates

  • DLA is calculated according to two components – the need for care and the degree to which your mobility is impaired. Both components are also graded according to higher and lower rates;
  • currently care component payments range between £21.80 and £82.30 a week;
  • the mobility allowance varies between £21.80 and £57.45 a week;

Personal Independence Payments (PIP) – rates

  • PIPs, on the other hand, are only payable to those aged between 16 and 65 – so of little practical benefit to those who have retired;

Attendance Allowance

  • this is a non-means tested allowance for the over 65s who need a degree of support or care, when your ability to look after yourself is impaired by a mental or physical illness or disability;
  • there are two bases for qualification, with payments currently of £55.10 a week if you need care during either the day or the night; and £82.30 a week if you need help and support during both the day and the night.

A comparison of the figures for the former Disability Living Allowance and Attendance Allowance reveals that the level of financial support available for those who need care at home during their retirement have been significantly decreased.

Housing benefits housing benefits

Housing Benefit is another of the publicly funded sources of help – for those of working age and for the retired – that is being phased out and replaced by Universal Credit.

Housing Benefit is intended purely to help people on low incomes to pay their rent. It is available only for tenants and not for those looking to pay a mortgage or other form of home loan.

Housing benefit is paid by your local council and the amount you get depends on a range of factors such as the amount of rent you pay, what income you have – including that from other benefits – and where you live.

A story in the Mirror newspaper on the 23rd of November explains some of the background to the introduction of Universal Credit, which is intended eventually to replace a whole catalogue of existing benefits – Employment and Support Allowance, Income Support, Jobseekers Allowance, Working and Child Tax Credits and Housing Benefit.

When it comes into nationwide effect, however, Universal Credit is not available to anyone over the state pension age. Instead, pensioners seeking financial help with the payment of rent or any other expenditure if their income is less than the current maximum state pension payment of £155.60 a week

Pension Scams

Almost 1 in 5 people over the age of 50 have been targeted by scammers according to recent research and many are being caught out by what appear genuine pension specialists, so take care.

 Pension scams are big business potentially conning people out of thosands of pounds invested in their pension pots.

How not to be next

  • Never talk to anyone who has cold call you out of the blue - you wouldn't talk to a stranger in the street about your pensions, let alone hand over £000's, so why do it on the phone?
  • Do your homework - we all like to think that we know best, but sometimes it's good to check no matter how confident you feel about something.
  • Make sure your adviser is on the FCA Register of approved people; you can check this out here www.fca.org.uk/register
  • Steer clear of "too good to be true" offers, especially if they are abroad
  • Never be rushed into making a decision
  • Ask the Pensions Advisory Service for help click here

If you think you have been scammed call the Action Fraud Line on 0300 123 2040.

There is also a useful website with more details on how to avoing being scammed here at The Pension Regulator

Pensions Glossary

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Discussion about pensions may often appear overly complicated and involved, not least because of the number of unfamiliar technical terms that are widely used.

The following jargon-busting glossary is our quick guide to some of the terms you are most likely to encounter:

State Pension

This is the pension to which you are entitled if you have made National Insurance contributions for a prescribed, minimum number of years;

Although the earliest you may qualify for payments of a State Pension is 65 (60 for women), both of these are being raised in the very near future;

Personal or Private Pensions

Just as the term suggests, this is a private pension scheme, entirely separate from your National Insurance contributions and the State Pension which follows;

Private or personal pensions are tax-free money purchase plans which you may set up independently of any scheme operated by your employer

Workplace or Company Pensions

Also called occupational pensions, these are run by your employer as part of the overall remuneration package you receive for the job;

Both you and your employer contribute to a pension fund which becomes available for withdrawal at an agreed retirement age and the government also contributes to the benefits by way of tax relief on payments you make to your workplace pension scheme

Final Salary Pension Schemes

Just as the term suggests, this refers to a once quite widespread type of pension scheme in which the amount of your pension is related to the final salary you were earning immediately before you took retirement;

Although many are still in payment, it is increasingly rare for those in work to be offered any such scheme – simply because they are so expensive for pension funds to provide.

Money Purchase Pension Plans

These do not rely upon your final salary at work, but instead relate directly to the contributions made to a pension pot by you and your employer;

For that reason, they are also known as defined contribution plans;

The amount of pension you eventually receive is determined by the total amount that has been contributed and the performance of the investments made by the pension fund managers

Stakeholder Pension Plans

Stakeholder pensions are a specific variety of personal pension plan, to which you make your own private contributions;

With a stakeholder scheme, however, there are government regulations limiting the amount of fees and charges that may be raised by the pension fund managers and other rules governing security of and access to the fund

Pension Release

Also known as pension “unlocking” this typically refers to attempts to access and withdraw funds from your pension pot before you reach the age of 55;

55 is the age at which you are legally entitled to access your pension funds, although the rules of a particular workplace, personal or stakeholder scheme may set the qualifying age somewhat later – say, 60 or 65;

Although methods exist for accessing the future value of your pension fund before you reach the age of 55, there are frequent warnings – not least from the financial services regulator, the Financial Conduct Authority (FCA) - about the costs you may face in early release of the funds, including your tax liabilities. That is why seeking specialist pensions advice is always recommended.

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