In the UK, the ‘Automatic Enrollment’ scheme, which comes into effect in April 2017, means that it will be compulsory for employers to enroll employees into a workplace pension scheme. Of course, this could result in an added expense if you are an employer, as it is fast becoming the norm for you to match employee contributions to a minimum level or percentage.
However, this isn’t legislation you want to be messing with, and it’s important to ensure that you are well versed in the regulations in order to ensure that you can implement the process within your business smoothly, and in ample time.
It’s also a good time to think about your own retirement plans, and how you’re covered in terms of a pension(s). For those not entirely satisfied with their own standard workplace pension schemes, a Self-Invested Personal Pension is becoming a popular supplementary option. This type of pension is approved by the UK government, and allows individuals to make their own choices about where they would like to invest their money as part of a full range of investments approved and endorsed by HM Revenue & Customs (HMRC). There are four main types of SIPP:
- Deferred: This usually involves having your pension assets tied up in insured pension funds, with income withdrawal being deferred until an unspecified date.
- Hybrid: As the name suggests, this involves a combination of the above, while also having a portion of your assets as ‘self-invested’. This has arguably been the most popular type of SIPP to date among providers and investors.
- SIPP Lite: This is appropriate if you are looking to invest in one particular asset class, with the major benefit being that there are lower fees involved for this. Most schemes also allow an upgrade to a full Sipp (see below) in the future.
- Full SIPP: Essentially this is a SIPP with unrestricted access to the various approved investment types.
Putting together your SIPP
There is a fee for setting up your SIPP (sometimes up to £500), along with an annual management fee. You will also likely be in for charges on drawdowns, transfers and dealing (each time you buy and sell an investment – sometimes up to £12.50 a pop). It’s thus worth shopping around with different SIPP providers to see who charges what, and who can offer you the best value.
The good news though is that contributions to SIPPs are taxed in exactly the same way as other types of personal pension, and you are thus afforded these same protections in terms of deductions before tax.
Since the start of the 2016/17 tax year, earners can still contribute up to 100 per cent of their pre-tax income, although the upper limit for contributions will be gradually reduced at a rate of 50p for every £1 earned over £150,000 until the tax-free limit reaches the £10,000 barrier. For non-earners meanwhile, you can effectively contribute up to £2,880 per financial year without paying tax, with the taxman topping you up a further £720.
Pensions freedom and using your pension pot wisely
In April 2015, then-Chancellor George Osborne launched his flagship pensions freedom, which essentially gave over 55s full access to their pension pots, and this is applicable to SIPPs too. However, whether you’ve gone down the SIPP route or not, this has far-reaching implications. Of course, the ability to draw down from your pension with minimal or zero charges and/or taxation is a huge boost in terms of flexibility. This is underpinned by the fact that annuitising your pension pot is no longer mandatory, and you are free to use your funds as you wish.
But with this comes added responsibility, and a need to preserve your nest egg so that your retirement is secure financially. If you wish to avoid the option of annuitising, you probably wouldn’t want to look too much further than the options approved by HMRC for SIPP investments. All the usual suspects take their place within the fray such as stocks and shares, investment trusts, gilts and corporate bonds, property and cash.
But one option which is appealing to retirees more and more is peer-to-peer lending, which, as the name suggests, involves lending money to consumer borrowers. Although returns aren’t guaranteed, investors typically can earn in excess of 5 per cent on their money. What’s more, the fact that you are able to take these repayments as an income affords you the fluidity and flexibility which can make this an ideal money churner during your golden years.
All in all, there are a myriad of options, regulations and finer nuances involved with pensions and retirement, and it can be a bit exasperating to get your head around it all. But whether you’re an employee, an employer or just a shrewd investor, it’s worth taking the time to learn your ABCs so that you can stay on top of things, and ensure that your golden years are every bit as enjoyable as you imagined them to be.