Do you know what your pension can do for you?
Other than the state pension, there are two main types of pension scheme: money purchase and defined benefit.
Money purchase (MP) schemes don’t guarantee pension benefits, as these are linked to pension fund values, which fluctuate according to investment returns. Some MP schemes include valuable features, such as guaranteed annuity rates or protected lump sums. Annuity or drawdown options must be assessed.
A defined benefit (DB) pension is ‘guaranteed’, because it’s based on final salary and length of employment service, not market vagaries. Companies no longer offer DB pensions, because costs are prohibitive. Therefore, if you do have a DB scheme, you should treat it as gold dust.
DB schemes have had much press coverage recently: to transfer, or not to transfer? That’s the question.
Transferring out of a DB scheme involves foregoing all pension guarantees in exchange for a lump sum pension fund. While the death benefits position improves immediately on transfer, income in retirement may not. Consideration of the potential benefits and disadvantages of transferring from a DB scheme in light of your objectives is essential.
For those fortunate enough to have non-pension resources to help fund their retirements, DB transfers may be attractive: MP pension funds may be passed on tax-effectively to future generations. Provided that an expression of wishes is correctly worded, pensions can be inherited as income or lump sums. If a pensioner dies before the age of 75, their heirs can inherit their pension and draw tax-free amounts from it. On death after age 75, amounts drawn from an inherited pension are subject to income tax. All growth within the pension fund is tax-free.
Whether you have MP or DB pensions, it’s essential to think about the following:
- How secure is your pension income? Annuity purchase or income drawdown?
- How much tax-free cash you should take?
- What is the most you can save into pensions?
- How to avoid the lifetime allowance charge?
- How to maximise the amount that can be passed on to your heirs?
Strabens Hall is able to assist you with all of these issues.
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Adam Benskin, Director at Strabens Hall