Your pension questions answered

In our the webinar we held in partnership with PensionBee there were lots of fantastic questions; so many that we weren’t able to answer them all in the class.

I didn’t want anyone to miss out, so I have gathered the questions from the webinar. Some were answered in chat by Becky O’Connor, PensionBee’s Director of Public Affairs. I have copied her answers over here. And any questions she wasn’t able to get around to, I have answered for you.

Hopefully this will be a helpful resource.

How can you work out how much income you’ll get from your pension pot each year? 

You can see how much you might get per year from your pension pot using handy online calculators, like this one from PensionBee

How many years retirement should you plan for, if for example you plan to retire at 67 years?

30 years is a sensible and cautious estimate. The average life expectancy for women is approaching the mid-80s, but of course, the big unknown is how long any of us will live for. It’s good to go on probabilities.

Is there a way of working out how much your pension pot will reduce by, year on year, when you start to take drawdown, in order to see how long the pot will last?

You can use a drawdown calculator, like this one from Which! to see how long your pension pot will last, depending on how much you tax a tax-free lump sum, how much you want to withdraw each year and how much interest you may earn, etc.

How do you know if you qualify for the full state pension?

To qualify for the full State Pension, you will need a total of 35 years of NI contributions or credits by the time you retire. To find out how much State Pension you are entitled to you can check here.

If you don’t have enough qualifying years you can pay voluntary Class 3 contributions to fill gaps in your National Insurance record to qualify for the State Pension. You can find out more here

Is it worth deferring your State Pension?

If you wish, you can choose to defer your State Pension and increase the amount you receive each month when you do take it. If you defer for one year, after April 2025 you will get just over £670 a year more. However, you will have ‘lost’ the approximately £11,500 you would have otherwise have been paid.

So is it worth deferring? The hope is that you would get the amount you missed out on back and more over time – indeed this is usually the case. Of course there is always a risk is that you wouldn’t live long enough to make it back.

Is it worth taking a deferred benefits pension a couple of years early?

If you decide to take your deferred benefits early, they will usually be reduced to reflect the fact that your pension will be paid for longer. How much reduction is applied will depend on how early you choose to take them.

Is investing in a property a viable alternative to a pension?

While many people include a property as part of their retirement financial planning, you may not want to rely on it solely in place of a pension. 

The issue with depending on property for your retirement income is that it’s not quick or easy to turn into spendable cash. Yes, you would have an income from any rent paid to you by tenants, but what if your tenants default on rent, your property is unoccupied, or you have expensive repairs? 

Relying solely on property for your pension is one of those ‘eggs in one basket’ scenarios that is generally wiser to avoid. 

How does an annuity work and is it better than property income?

An annuity is an income that is paid to you for a fixed period of time or for the rest of your life. On the plus side, this gives you the peace of mind of knowing your pension is guaranteed to last. You may also have the option to pass your annuity on to your beneficiaries, depending on the type you have and if you’ve started receiving income.

However, annuities can be complex and can have high fees. Purchasing an annuity is also irreversible. 

Income from a property is less reliable and consistent than an annuity, as it depends on your property being rented out, your tenants paying and not having expensive repairs. However, you do have a sellable asset (your property) and you are free to leave your property to whoever you wish when you die. 

Many people prefer to see pensions and property less as an ‘either or’ option, but instead choose to create a portfolio of retirement income streams. You can read more about the pros and cons of pensions here.

I’ve heard a lot about SIPPs. Are these tax free (like ISAs) or are they taxed in the same way as other pensions?

Like pensions, SIPP contributions get tax relief upfront, but your withdrawals are taxed. ISAs don’t have tax relief, but your income and gains are tax-free.

Can I start a pension for my child?

Yes, a child can have a pension from birth – there’s no minimum age for starting one. A pension can only be set up by the child’s parent or guardian, but once it’s started, anyone can contribute. 

You can pay up to £2,880 into a child’s pension. With 20% tax relief from the government, this adds up to £3,600.

What are the options for starting a pension for my daughter who’s age 19, a university student, and is self-employed part-time?

Your daughter can start a pension – the earlier she does the better, even if she’s only saving a small amount now. And as she is self-employed she’ll get tax relief on her contributions too, even she doesn’t earn enough to pay tax, as we cover further down.

Do you have to be a nominated beneficiary on your spouse’s pension, even though you are married?

No, you don’t need to nominate a spouse or registered civil partner. If you have not nominated anyone else, they will receive all of your adult dependant’s pension and lump sum benefits when you die. 

If you have previously nominated someone, such as an ex-partner, they will receive any benefits, even if you have remarried. So it’s important to check who you have nominated, especially if you have divorced. You can cancel or change a nomination by completing a new nomination form.

What protection is available if your pension provider goes under before you retire?

There are a number of protections for pensions. The Financial Services Compensation Scheme (FSCS) protects you for up to £85,000 per person, per institute. And, provided your pension provider is has been authorised by the Financial Conduct Authority (FCA), it is covered as following way:

  • If you have a private pension and it fails, the FSCS will cover 100% of your claim with no upper limit.
  • If you have a SIPP and your operator fails, you are protected by up to £85k per person, per institute.
  • If you have received bad pension advice, you can claim compensation up to £85k per eligible person, per firm.

What happens if you die before pension age? What happens to any pension pot you have contributed to?

If you die before you’ve used up your pension pot, its value will usually be paid to your beneficiaries. These can be a dependant or a nominee. If you die before the age of 75, any benefits paid to your beneficiaries will normally be tax-free. However, if you die after the age of 75, they will be subject to income tax.

What’s the best way to locate lost pensions? For example if you know who you were employed by but not the pension details?

The Government have a free pension tracing service. Your employer name should be enough to go on.

I have found an old pension sitting dormant, but obviously admin fees are being taken out. What can I do about it?

If you have another pension, you may choose to combine them.

What you need to look out for when considering whether to consolidate several small pension pots?

Combining several small pension pots into one can make sense, as it’s easier to manage.

One of the things to look out when deciding whether to combine pensions is fund performance. If you have a number of small pots, you may find that one has outperformed the others. However,  past performance is not a guide to future performance, so check the consistency of your funds’ performance over time.

It’s a good idea to speak to a financial advisor before making any significant decisions, as they can help you assess your options and take into account things like your risk profile. 

Are the pension figures pre- or post-income tax? 

The figures we use in this pension article are pre-tax.

What happens if you don’t pay tax? Would the government still top up the 25% in that situation?

If you don’t pay tax and you still want to pay into a pension, you can still get tax relief on contributions up to £3,600 (£2,880 net).

Is it possible to back date tax support for business owners if you’ve not made use of it previously?

Yes, you can claim back tax relief for the last four tax years. It’s also worth noting that, if you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your self-employed pension contributions, for a total of 40% tax relief. However, this relief isn’t automatic – you have to claim it.

What are the options to optimise the lost pension contributions made at previous employments?

Those pension pots you are no longer paying into will still hopefully be growing in value even though you aren’t contributing. If you are in an existing workplace scheme it’s best to keep contributing to that as you have employer contributions going in too.

If you don’t think old ones are growing enough you could consider moving them to a higher growth focused pension plan either with that provider or with a new one. Also, check charges on old schemes. Old policies have a tendency to have higher charges that can eat away at your returns.

Risk warning: As always with investments, your capital is at risk. The value of your investment can rise or fall, and you could receive back less than you invest. This information should not be considered as financial advice.

About PensionBee

PensionBee can help you combine your old pension pots into one online plan that lets you keep track of your balance, make flexible contributions, invest in line with your values and make withdrawals from the age of 55. For more information, visit PensionBee.

Learn how long your pension could last with the PensionBee Pension Calculator.

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