Pension & Annuity FAQs
It is important to understand all the facts about pensions and annuities before you take out your plan.
We hope you find the frequently asked questions and answers on this page useful. However if you have any questions call 0800 294 7221.
What is a pension?
A pension is a long-term investment which helps you build up a sum of money while you work, so you can use it to buy an income when you retire. You can’t access the money until you reach retirement age.
It's a tax efficient way for you to invest for your retirement because HM Revenue & Customs (HMRC) adds tax relief to the payments you make into your plan. For example, because basic rate tax is 20% and you make a payment of £80, the taxman will add £20 so the total invested into your plan is £100. This is known as basic rate tax relief.
If you pay tax at more than the basic rate, at 40% or 50%, basic rate tax relief at 20% will automatically be added to the payments you make into your plan. You may then be able to claim back the additional proportion of tax relief on your annual self-assessment tax return.
How much should I be saving?
How much you need to save for your retirement depends upon the level of income you want to live on when you are a pensioner.
Few people think they could manage on the basic state pension, which is currently just £97.65 a week for a single person. The simple rule is the earlier and the more you save, the higher your income will be in retirement.
What are the tax rules?
On 6 April 2006, HM Revenue & Customs (HMRC) introduced new allowances governing the amount of money you can build up in all your pension plans whilst still benefiting from income tax relief:
Tax Relief - There's no limit on the amount that you can pay into your personal pension and any other pension plans you have, but you won't get tax relief on payments over a certain amount. HMRC allows tax relief on your personal payments to your pension plans of up to £2,880 a year (which would become £3,600 with tax relief), or 100% of your UK taxable earnings if greater.
Annual Allowance - The Annual Allowance has an overall limit, which is £255,000 in the tax year 2010/11. If total payments from you and your employer to all your pension plans are above the Annual Allowance they will be subject to a tax charge. The Annual Allowance doesn't apply in the tax year that all benefits are taken under the plan.
Lifetime Allowance - The Lifetime Allowance is a limit on the amount of money you can build up in all your pension plans without losing tax advantages. Any amount above this allowance will be subject to a tax charge when benefits start payment. The Lifetime Allowance is £1,800,000 in the tax year 2010/2011. As well as the amount you're currently building up in pension plans, the Lifetime Allowance also takes into account the value of any pensions already being paid to you and any tax-free lump sums you've received. If you already have pension funds that exceed the Lifetime Allowance or you think may exceed it in future, you should talk to a financial adviser before taking out a personal pension.
How do you get tax relief?
You make your payments, less an amount equal to the basic rate of income tax. Your pension provider then claims this back from HM Revenue & Customs (HMRC) on your behalf and adds it to your plan, together with the amount you have paid. This is often referred to as making payments net of basic rate tax. For example, if basic rate tax is 20% and you pay £160 into your plan, HMRC will add £40 to this, so the total invested is £200. This is known as basic rate tax relief.
If you pay income tax at a rate higher than the basic rate, the payments made into your plan will only be increased by basic rate tax relief, but you will be able to claim higher rate tax relief on your annual self-assessment tax return, subject to certain limits.
What are my options at retirement?
The earliest date you can access your retirement savings is 55. You can take up to 25% of your pension pot as tax-free cash. The remainder of your money has to be used to provide you with an income, although you have until you are 77 before you have to do this.
There are a range of ways you can take your retirement income. The simplest route to an income at retirement is with an annuity and a range of these products are offered through TQ invest.
The more complex products such as Income Drawdown, Investment Linked Annuities and Alternatively Secured Pensions require the advice of an Independent Financial Adviser. You can talk through these options by speaking to our sister company Torquil Clark, a Chartered firm of Independent Financial Advisers.
What happens if I die before I retire?
If you die before you start receiving your pension, your pension provider normally pays the full value of your fund as a lump sum. If your plan contains protected rights funds, these must be used to provide an income for your surviving widow, widower or civil partner. You can specify the person or people you would like to receive all or part of a lump sum. You can change the people named at any time by writing to your pension provider.
If you prefer, you may be able to set up your own individual trust, so that your pension provider pays any lump sum to trustees appointed by you. We recommend that you see a solicitor before setting up a trust.
Any lump sum paid on death will count towards your Lifetime Allowance. However, instead of your fund being paid out as a lump sum, it can be used to give your dependants an income for as long as they live – and any benefits paid in this way will not count towards your Lifetime Allowance.
- What is an annuity?
- Which annuity is right for me?
- Am I eligible for an enhanced or impaired annuity?
- When should I buy an annuity?
- What is the open market option?
- Why should I shop around?
- Do I have to take an income, can I not just withdraw my pension savings as cash?
- Do I have to take tax-free cash from my pension fund?
- Can I change my annuity options?
- What happens if I have more than one pension fund?
- How will my annuity income be paid?
- Will I pay tax on my annuity income?
- How will my annuity income be paid?
What is an annuity?
An annuity guarantees to provide you with a regular income for the rest of your life, in return for you paying over a lump sum from your pension fund to an annuity provider. The income is intended to take over from your earnings when you retire, but you can continue working and still have an annuity if you choose. You can also defer buying an annuity when you retire and keep your money invested, but you must normally purchase one before you turn 77.
Which annuity is right for me?
There are a number of different ways to take an income from your pension fund and annuities are one option. At TQ Invest we are able to provide you with an instant quote for lifetime, fixed-term and enhanced or impaired annuities. You can also read more in our guide to annuities here.
Am I eligible for an enhanced or impaired annuity?
If you have an illness, condition or a lifestyle habit that may shorten your life, you may qualify for an 'enhanced' or 'impaired life' annuity and this may pay you a higher income. Typically a report will be required from your GP.
When should I buy an annuity?
You don't have to buy an annuity when you reach the retirement age shown on your pension plan. You can continue to work and make extra payments into your pension, or you can just leave your fund invested while you make a decision. You can't access your pension fund until you are 55 and if you decide to take any tax-free cash, you must do so before you turn 77 and at the point you take out your annuity.
What is the open market option?
The open market option enables you to shop around all annuity providers when you reach retirement, to find the one which offers you the highest income. Your pension provider will make you an offer when you reach retirement, this isn't always the best deal.
Why should I shop around?
Shopping around annuity providers is the easiest way to increase your income in retirement. If you are eligible for an enhanced or impaired annuity, the difference in income over your retirement can be thousands of pounds.
Do I have to take an income, can I not just withdraw my pension savings as cash?
If the total of all your pension funds is less than £18,000 (for the 2010/11 tax year) then you can withdraw it all as cash. However, only 25% will be tax free, the remainder will be taxed as earned income under PAYE.
If the total value of all your pensions is more than £18,000 (for the 2010/11 tax year) then you must take an income with your pension fund. However with many pensions you can take up to 25% as a tax-free lump sum. (If taken this means you will receive about 25% less income when you purchase your annuity - after any fixed charges are taken into account).
Do I have to take tax-free cash from my pension fund?
No you don’t. You can keep this money invested and use it to buy a larger retirement income. However this may not be the most tax-efficient way to provide any extra cash flow you need, as the income payable through a personal pension or annuity is taxed. You can only elect to have the tax-free cash when you choose your annuity option - it cannot be opted for once the annuity is in payment, or if you are 77 or older.
Can I change my annuity options?
No, once set up you can’t change your annuity arrangements which is why it is important to shop around and select the right annuity for you. If you are unsure, you can speak to an Independent Financial Adviser from our sister company, Torquil Clark, who will be happy to help.
What happens if I have more than one pension fund?
It depends on the type of pensions you have. You may be able to combine your different pensions into one fund to maximise the annuity you can buy. Speak to TQ Invest on 0800 294 7221 to find out if you can consolidate your pensions.
How will my annuity income be paid?
You can normally choose to be paid monthly, quarterly, half-yearly or yearly, and in advance or in arrears. Whatever the frequency, you'll get the highest income if you can be paid in arrears (at the end of the period).
Will I pay tax on my annuity income?
Annuity income payments are treated the same way as income you earn while working when it comes to tax. If you are a United Kingdom basic rate taxpayer, you will be taxed at the rate of 20% on your annuity income for the tax year to April 5, 2011, subject to your personal allowance. (In the tax year 2010/11 everyone up to age 65 has a personal allowance of £6,475, rising to £9,490 between the ages of 65 and 74 and £9,640 at 75 and over. This means you can earn this amount without paying tax.) If you pay income tax at the higher rate you may be liable for tax on your pension income at the higher rate.
Will my partner continue to be paid after I die?
No, not unless you choose a 'joint life' rather than a 'single life' when you take out your annuity.
With a fixed term annuity there are value protection options which can protect beneficiaries.