Contents. How does a defined contribution scheme work?

Transcription

1 Defined contribution pension schemes This information is an extract from the booklet Pensions, which is part of our Financial guidance series. You may find the full booklet helpful. We can send you a free copy see page 11. Contents How does a defined contribution scheme work? When can I take my pension benefits? How can I take my pension benefits before retirement? How can I take my pension benefits at retirement? Which is the best option for me? When can I retire due to ill health? If you re getting means-tested benefits How does a defined contribution scheme work? In this scheme, you (and usually your employer if you have one) pay in contributions which are invested in an investment fund or a number of different funds. These will hopefully grow. The total amount you have saved is called your pension pot. A defined contribution pension scheme has two stages: Accumulation This is when you are building up your savings before you have retired. Your pension pot is uncrystallised at this stage. Decumulation This is when you are taking money out of your pension pot after retirement. Your pension pot is crystallised at this stage. When you come to take your benefits, the size of your pension pot will depend on: how much money you have paid in how much money your employer has paid in (if it is a workplace scheme) Questions about cancer? Ask Macmillan Page 1 of 11

2 how well your pension savings have been invested and grown how much has been taken away in charges. Your pension provider should send you a benefit statement every year. This tells you how much your pension pot is worth and gives you an estimate of how much pension you will get. The bigger your pension pot is, the more benefits you will be able to take. After the April 2015 changes, once you reach the age of 55, you can now use your pension savings in any way you wish. See pages 2 9 for information on retirement options. When can I take my pension benefits? With a defined contribution scheme, the earliest you can take your pension benefits is at the age of 55. If you have a workplace pension, most employers can no longer set a compulsory retirement age. Starting your pension earlier will usually mean your pension is a lot lower. If you have or have had cancer, you may be able to retire earlier because of ill health. With some schemes, there are extra benefits to this (see pages 8 9). We can help if you want to take early retirement. If you have a defined contribution pension we can guide you through the new pension freedoms and can also help if you want to shop around for an annuity. These can both make a big difference to your retirement income. David, Macmillan financial guide Page 2 of 11 Questions about cancer? Ask Macmillan

3 How can I take my pension benefits before retirement? The rules for defined contribution schemes have changed from April You can now take out your pension savings in any way you like from the age of 55. Under the new rules, if you are aged 55 or over, you can take out some or all of your pension savings as cash lump sums. This can be done before you have retired, while still in the accumulation stage (see page 1). Each amount is called an uncrystallised funds pension lump sum (UFPLS). 25% of each lump sum is tax-free. The rest is taxed as income in the year that you take it. If you currently pay tax at the basic rate of 20%, a large lump sum from your pension may push you into the higher tax band. This means you may pay 40% or even 45% tax. Taking lump sums now will mean less retirement income later on. If you have a workplace pension scheme, it may not offer this type of lump sum option. If this is the case, you may be able to transfer into a personal pension and then choose lump sum payments. But before you do this, check what charges may be taken from your savings and whether you will lose any valuable benefits. Unless you spend it or give it away, whatever you take out from your pension savings will become part of your estate after you die. Whoever you leave it to may then have to pay inheritance tax. It s important to speak to a financial adviser about tax issues before you decide to take a lump sum from your pension. Questions about cancer? Ask Macmillan Page 3 of 11

4 I had a work pension that I have cashed. I now have a lump sum and a monthly payment. I might not get as much as I would when reaching retirement age but I need the money now. Alison How can I take my pension benefits at retirement? You can decide to retire at any time from the age of 55. You will then move into the decumulation stage (see page 1). At this point, your pension pot stops being uncrystallised and you can t take any more uncrystallised funds pension lump sums (UFPLS). Pension commencement lump sum (PCLS) When you decide to retire, you can take up to 25% of your pension pot as a tax-free lump sum. This is known as a pension commencement lump sum (PCLS). You can take all of your pension savings as a lump sum if you want to, but only the first 25% is taxfree. The rest is taxed as income. You can use the rest of your pension pot to: invest in a flexi-access drawdown fund to give you flexible access to your savings (see pages 5). buy an annuity to give an income for life (see pages 6) Any savings you take out through an annuity or flexi-access drawdown fund are taxed as income in the year you take them. Page 4 of 11 Questions about cancer? Ask Macmillan

5 The scheme you are in now may not offer all of the options described on page 4. You could transfer to another scheme that does offer them. But check what charges may be taken from your savings and whether you would lose any valuable benefits. For example, you may give up an annuity that pays a guaranteed rate higher than you can get elsewhere. Think about getting financial advice. With a defined contribution scheme, you build up your own savings by paying in contributions. So the earlier you start taking your pension, the lower the amount you are likely to get each year. Flexi-access drawdown Flexi-access drawdown is a type of financial product. You can choose to invest your pension savings in a flexi-access drawdown fund and take out your savings as often as you like. If you have a workplace pension scheme, it may not offer the flexi-access drawdown option. You may be able to transfer into a personal pension and choose this option. Visit pensionwise.gov.uk/shop-around for information on how to shop around for the best flexi-access drawdown product. It is possible to run out of money when invested in a flexi access drawdown fund. It s important to take financial advice to work out the best option for your situation. You may run out of money if: you take out too much of your pension savings your investments don t do as well as expected you live longer than expected. Questions about cancer? Ask Macmillan Page 5 of 11

6 What happens after you die When you die, you can leave your pension to any person you choose (your beneficiaries). If they decide to take your pension savings as income, they will: pay tax on it as income if you are aged 75 or over when you die pay no tax if you die before the age of 75. If they choose to take it out as a lump sum, they will: pay tax at 45% if you are aged 75 or over when you die pay no tax if you die before the age of 75. JARGON BUSTER Beneficiary A person who gets your money after you die, for example from your will or pension scheme. Annuity An annuity is a type of financial product sold by insurance companies. In exchange for your pension savings, you get a guaranteed income for the rest of your life. You can also choose to provide an income for someone else, if you feel it is likely you will die before them. Your pension scheme may offer you an annuity. But you also have the option of shopping around and buying your annuity elsewhere to get a higher income. This is called the Open Market Option. If you have or have had cancer, you re likely to qualify for an impaired-life annuity. This will pay out a higher income than you would normally get from an annuity. Visit pensionwise.gov.uk/shop-around for information on how to shop around for the best annuity product. The Money Advice Service (visit moneyadviceservice.org.uk or call ) also has an online tool that can be a good starting point when looking for annuities. Page 6 of 11 Questions about cancer? Ask Macmillan

7 Unlike flexi-access drawdown, there is no risk of running out of money. The income is guaranteed for the rest of your life. What happens after you die When you die, if the annuity carries on paying an income to someone else, they will: pay no tax if you die before the age of 75 pay tax on it as income if you are aged 75 or over when you die. Impaired-life and enhanced annuities Some pension providers offer impaired-life or enhanced annuities. An impaired-life annuity pays out a higher income to people with particular health problems, including cancer. It is based on your personal circumstances and is paid for the rest of your life. Enhanced annuities pay more to people with particular lifestyles or people with certain health conditions who may not be expected to live as long. An enhanced annuity is less specific to your individual situation. It s important to shop around for the best deal if you are looking for an impaired-life or enhanced annuity. If you re living with cancer, an impaired-life or enhanced annuity could make a big difference to your pension. But taking lump sums or income out flexibly, using the new rules, may suit you better. Call our financial guides on to talk about your options. Which is the best option for me? Your pension provider will tell you what options are available to you. This will depend on: the size of your pension savings whether you want to leave any savings to beneficiaries in your will how much income you and your family need to live on whether you have any income from other sources how long you expect to live. Questions about cancer? Ask Macmillan Page 7 of 11

8 Remember that, before you buy an annuity or invest in a flexi-access drawdown fund, you can take up to 25% of your savings as a tax-free lump sum. Multiple options You don t have to choose just one option. You can even start to access parts of your pension pot at different times. For example, you could: leave part of your pension savings invested and take out uncrystallised funds pension lump sums (see page 3) use another part to invest in a flexi-access drawdown fund when you retire (see pages 5 6) use another part to buy an annuity (see pages 6 7). Financial advice It s very important to speak to a financial adviser to make sure: you choose the best option for you your pension withdrawals do not affect your state benefits you are not left with a big tax bill. To discuss either lump sums or flexi-access drawdown, you should get specialist advice from a financial adviser who has a specific pension qualification. You can find a financial adviser by asking family and friends for a recommendation, or by visiting the websites listed below. unbiased.co.uk financialplanning.org.uk/wayfinder Always make sure the financial adviser is authorised by checking their entry on the Financial Services Register at fca.org.uk/register Page 8 of 11 Questions about cancer? Ask Macmillan

9 Free guidance The government is giving free guidance on the new rules, under a scheme called Pension Wise (visit pensionwise.gov.uk or call ). You can also call our financial guides on to talk about any of the changes in more detail. The guidance will help you to understand your options, but can t give recommendations. If you want help deciding on the right option for you, you should contact a financial adviser. See page 8 for information on paying for financial advice. When can I retire due to ill health? You may be able to retire before the age of 55 if you have ill health. Your illness usually has to be permanent and is stopping you from working. But it may depend on the rules of your pension scheme. If you qualify for ill-health early retirement, your pension scheme will tell you what your options are. They could include: a one-off lump sum an annuity (but shop around for an impaired-life or enhanced annuity) flexi-access drawdown a combination of the above. See pages 4 8 for information on these options. Life expectancy less than 12 months If you have a life expectancy of less than 12 months, you may be able to retire because of serious ill health. You will usually get a one-off lump sum representing the value of your pension benefits. If you re under 75, the whole sum will usually be tax-free. In this case, a registered medical professional must give evidence to the scheme administrator that your life expectancy is less than a year. Questions about cancer? Ask Macmillan Page 9 of 11

10 If you are 75 or older, 25% of the lump sum will be tax-free and the rest taxed as income. If you die while still in employment, your pension scheme may pay out a lump sum called death in service. But this is not paid after you have retired. It s important to speak to a financial adviser to make sure you take the best option for your situation and for your dependants. Whatever you take out from your pension savings will become part of your estate after you die. Whoever you leave it to may then have to pay inheritance tax. If you re getting means-tested benefits Deciding whether to take your pension savings as a regular income or one or more lump sums may affect the meanstested benefits you get both now and in the future. This can be complicated to work out, so you may want to contact our welfare rights advisers on JARGON BUSTER Means-tested benefit A benefit that you may be able to get if your income and your savings are below a certain level. Page 10 of 11 Questions about cancer? Ask Macmillan

11 NEXT STEPS Speak to your pension provider or employer to find out your options for early retirement. For an estimate of how much pension you may get at retirement, check your latest benefit statement (see page 1). Compare your options at retirement. Get free guidance (see page 9) and think about personalised advice from a financial adviser (see page 8). Compare different annuity providers. Remember that you don t have to keep using the same provider you currently use. If you ve had health issues, comparing deals or looking at other options could lead to a significant increase in your pension. Call our financial guides on for more information or to discuss your options. More information and support More than one in three of us will get cancer. For most of us it will be the toughest fight we ever face. And the feelings of isolation and loneliness that so many people experience make it even harder. But you don t have to go through it alone. The Macmillan team is with you every step of the way. To order a copy of Pensions or any other information from our financial guidance series, visit be.macmillan.org.uk or call We make every effort to ensure that the information we provide is accurate and up to date but it should not be relied upon as a substitute for specialist professional advice tailored to your situation. So far as is permitted by law, Macmillan does not accept liability in relation to the use of any information contained in this publication, or thirdparty information or websites included or referred to in it. Macmillan Cancer Support Registered charity in England and Wales (261017), Scotland (SC039907) and the Isle of Man (604). Registered office 89 Albert Embankment, London, SE1 7UQ REVISED IN MAY 2015 Planned review in 2016 Questions about cancer? Ask Macmillan Page 11 of 11