Pensionwise

Understanding what Pensionwise is and how to use it

If you are aged 50 or over and have pension based on how much has been paid into your pot (a defined contribution pension), you can get free guidance from Pension Wise - a new service backed by the government. This guide explains how Pension Wise works and how to prepare for your appointment.

• Free, impartial guidance – backed by government

• How to get your free Pension Wise guidance

Free, impartial guidance

Pension Wise is a free government service that helps you understand what you can do with your pension pot money.

It offers guidance on the Pension Wise website about the options for taking your pension pot, and can help you understand the tax implications.

It also offers free guidance appointments over the telephone or face-to-face where you can talk through these options, ensuring you have the information you need to make the right decision.

Pension Wise can help you:

• Understand the tax implications of each available choice

• Understand the different options for accessing your pension pot(s), and the potential advantages and disadvantages of each

• Understand the right things to think about when considering your choices, such as your plans to continue working, your personal and financial circumstances, and leaving money after you die

The service is impartial and free for you to use.

However, it won’t recommend companies or tell you how to use your pension pot or invest your money.

How to get your free Pension Wise guidance

You can get Pension Wise guidance online, over the phone or face-to-face.

You can visit the Pension Wise website by clicking here to see what the service offers and to begin to understand your available options.

If you want to book a telephone or face to face appointment call 0300 330 1001 .

Preparing for your appointment

To make the most of a Pension Wise appointment it would be helpful to have:

• The value of your pension pot(s) and whether there are any guarantees or special features that apply to your pot. Check your pension statement or ask your scheme or provider for an up-to-date valuation. If you have more than one pension pot remember to gather information on all of your pots together

• If you have lost track of any pensions, contact The Pension Tracking Service which is a free government-backed service

• An estimate of how much State Pension you might get – get a State Pension statement from GOV.UK or call Tel: 0845 3000 168

Before your appointment, you should think about your financial circumstances as a whole.

Such as your current salary or income, your likely living costs in retirement, and any relevant savings or debts.

You should also start thinking about how you want to use your money in retirement; whether you just need small sums or would prefer a regular income.

The Pension Wise appointment will also discuss relevant points such as any medical or health conditions that might affect your life expectancy.

Which might result in you getting a better income in retirement if you buy an annuity, how any benefits you’re currently receiving could be affected by how you take your pension.

Next steps

Pension Wise will provide you with next steps for each of the options available.

Once you understand your options we recommend that you shop around to get the best deal before making a decision.

You can also speak to a financial adviser who will help you finalise your choices and find the right retirement income products for you.

You can find FCA registered financial advisers who specialise in retirement planning using this website.

Advice sources

An editorial by Which? magazine in June 2018 

Can I get free advice at retirement? 

If you’re unwilling or unable to pay for financial advice, you can get free guidance, in some cases ‘personalised guidance’, from a number of government-provided services – Pension Wise, The Pensions Advisory Service (TPAS) and the Money Advice Service. Which? used undercover fieldworkers to make a number of calls to the services in June 2018 asking for assistance with plans to cash in a £100,000 pension to pay off an outstanding mortgage and to consolidate three pensions into a single plan. 

Pensionwise 

Pension Wise was set up in 2015 to coincide with the introduction of the so-called pension freedoms. You can have a conversation over the phone (which we opted to do) or face-to-face, but you must be over the age of 50 and have a defined contribution pension. Despite the current eight-week wait for an appointment, our mystery shoppers eventually dealt with well-informed call handlers who asked personal questions and then covered the chosen retirement option in detail. The calls follow the same broad format, lasting about 45 minutes – questions about the consumer’s finances, health, family situation and pension provision , followed by points to consider with the preferred option, and finally an overview of the alternatives . In our scenario, the call handlers had some insightful observations about the tax liability if you take a pot in one go, even working out how much exactly you would pay in tax, and also gave clear warnings about potential scams. 

The Pensions Advisory Service 

Callers to The Pension Advisory Service (TPAS) can get straight through to someone to discuss their question. Our first call about cashing in the pension was fairly succinct, with the caller told to contact her pension provider, phone Pension Wise or seek financial advice. The other telephone call was more productive, with tax implications discussed and the dangers of having no alternative retirement income highlighted. Conversations about pension consolidation were again quite brief. However, some key considerations around the flexibility gained by keeping the pots separate, the potential loss of benefits and possible transfer penalties were outlined by TPAS . A point about managing separate pots effectively in the post-2015 world was particularly insightful. 

The Money Advice Service 

The Money Advice Service covers all financial issues, with phone menu options for debt, pensions, benefits, home/mortgages and ‘other’. If you choose pensions, you’re connected to someone at TPAS. We chose the mortgages option and explained we wanted to pay off our home loan by cashing in a pension. Speaking to a financial adviser was immediately suggested and some help given to find one. By their nature, the guidance services featured above will have their limitations. Call handlers can outline options and provide impartial guidance (sometimes ‘personalised’ to reflect your individual circumstances), but they can’t provide financial advice or recommend specific products.

Should I pay for financial advice? 

While the costs may seem high, paying for professional advice could be an invaluable investment – especially if you have little experience investing. A financial adviser has the tools and experience to help you plan for a future without work and make sure your savings last throughout your retirement. 

When should I see an adviser? 

An adviser can add value when you’re considering complex products, such as pension drawdown or investments, or significant decisions in life, such as retirement or arranging care, and don’t have the time, knowledge or confidence to make decisions yourself.

The basic state pension

Please click here to visit the Government site which will provide you with information on the basic state pension.

The potential shock awaiting retirees

The potential shock awaiting retirees

 A  study in April 2109 shows there could be an unwelcome surprise for those who save too little, too late.

How much income do you think you’ll need in retirement? *1

Research shows that UK investors expect to need an income equal to two-thirds of their current salary to afford to live comfortably. Yet, the average amount received by today’s retirees is far less, at 53% of final salary.

This gap spells disappointment for those individuals and couples who do not have the funds to support the lifestyle they would like in retirement. It also raises the rather difficult question of how much of our salary we should be putting away to maintain our lifestyles after we stop working.

According to research by Schroders, a 25-year-old who would like to retire on a two-thirds pension at 65 should be tucking away 15% of their salary each year.

At that savings rate, an average annual return of 2.5% above inflation would create a pot large enough to produce a retirement income to meet their target.

But if that person was to save 10% of their salary, the annual return they’d need would shoot up to 4.2% over inflation. 

If they were to save only 5% of their salary (the current overall minimum contribution rate for auto-enrolment), they may need returns that exceed inflation by 7%. 

Unfortunately, history is not on the side of investors relying on achieving that rate of return over the medium to long term.

The Schroders research revealed general acknowledgement by non-retired people that they need to be saving more to achieve the standard of living they want in retirement. The difference between what they are saving, and what think they should be saving, was the biggest amongst Generation X – individuals aged between 37 and 50 – indicating perhaps a growing concern that they are at risk of leaving it too late.

“To have the best chance of a comfortable retirement, the lesson for younger workers is to start saving early,” says Lesley-Ann Morgan, Head of Retirement at Schroders. “Leaving retirement saving until you are nearing your 50s and 60s is likely to be too late to make up the savings gap.”

It’s about time

Some experts suggest that if you leave retirement saving until age 40, then you’ll need to put away at least 20% of your income – and that you should maintain this percentage as your earnings increase.

If that's a tall order, there might be other opportunities to boost your savings rate; for example, a bonus or inheritance could make a big difference to your long-term prospects. So, if you have surplus cash that is not earmarked for other purposes and you haven’t used all your pension allowances, making a one-off pension contribution can be a smart way to get nearer that retirement goal.

Time is your biggest ally when it comes to saving, thanks to the power of compounding. But that doesn’t mean there aren’t significant opportunities to catch up, and the end of the tax year presents an ideal opportunity to do so.

Source: 1 Schroders, Global Investor Study 2018

So what is a good pension pot at 55?

According to Scottish Widows, someone who has left pension saving to their 50s would need to put away £1,445 a month to achieve a £23,000 annual income at retirement.

This estimate was derived using The Telegraph Pensions Calculator, assuming someone earning £30,000 a year, with contributions being supplemented with a 4% employer contribution. The calculations allow for inflation, both in discounting back the final results so they’re in ‘today’s money’ and in assuming that contributions increase with earnings each year.

If you are in your 50s, make sure you check when you’ll start receiving your State Pension. Research by YouGov for the charity Age UK conducted in December 2018 found that one in four people aged between 50 and 64, equivalent to nearly three million people, don’t know what their State Pension age is.

Source: Schroders

Pensions & Tax Relief

Tax relief on pension contributions explained.

Find out how the government tops up your pension savings in the form of pension tax relief, and use our pension tax relief calculator to see how much you'll get.

What is pension tax relief ?

When you save into a pension, the government likes to give you a bonus as a way of rewarding you for saving for your future. This comes in the form of tax relief. When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. Tax relief is paid on your pension contributions at the highest rate of income tax you pay.

So:

• Basic-rate taxpayers get 20% pension tax relief 

• Higher-rate taxpayers can claim 40% pension tax relief 

• Additional-rate taxpayers can claim 45% pension tax relief 

In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly alternative way. 

• Starter rate taxpayers pay 19% income tax but get 20% pension tax relief 

• Basic rate taxpayers pay 20%  income tax and get 20% pension tax relief 

• Intermediate rate taxpayers pay 21% income tax and can claim 21% pension tax relief

• Higher-rate taxpayers pay 41% income tax and can claim 41% pension tax relief 

• Top rate taxpayers pay 46% income tax and can claim 46% pension tax relief

How pension tax relief works.

If you are a basic-rate taxpayer and were to contribute £100 from your salary into your pension, it would actually only cost you £80.  The government adds an extra £20 on top – what it would have taken in tax from £100 of your salary. 

Higher-rate (40%) and additional-rate (45%) taxpayers only need to pay £60 and £55 respectively to achieve the same £100 of pension savings.

How do I claim pension tax relief ?

The way tax relief is claimed depends on the type of pension you are saving into, and it’s worth checking with your scheme to see what method it uses, as you might need to do some extra legwork to get the full tax relief you’re entitled to. 

There are two main ways:

Pension tax relief from ‘net pay’

A ‘net pay’ arrangement is used by some workplace pensions, and don’t require you to do anything to get your full tax relief. 

Pension tax relief at source

 ‘Relief at source’ applies to all personal pensions and some workplace pensions. So, if you have a private pension with an insurance company, or a self-invested personal pension (Sipp), this will apply to you. 

If you’re paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary (technically known as ‘net of basic rate tax relief’). 

Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. 

Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief due to them. 

Your pension contributions are deducted from your salary before income tax is paid on them, and your pension scheme automatically claims back tax relief at your highest rate of income tax.

How much pension tax relief can I earn in 2019/20 ?

The government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the pensions annual allowance.  

It has been set at £40,000 for the tax year 2019-20. 

Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay. 

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

Pension tax relief for non-taxpayers and low earners .

Non-taxpayers, including spouses who aren’t in employment and children, are eligible for tax relief of 20%, even though they don’t pay tax. 

Remember, you can save 100% of your income into a pension to earn tax relief, so long as it doesn't exceed £40,000 in a year.  

So, if you earned £5,000 a year, you could save £5,000 into a pension. 

But if you earn £3,600 or less, including people that don't earn any money, the maximum you can contribute is £3,600. This includes the government top-up, so your personal contribution can be no higher than £2,880.