Pensions – An Essential Guide
Pensions can be complicated. Effective management of your pension will be crucial if you want to enjoy a comfortable retirement. We can help you both save for retirement and to manage your pension savings during retirement.
How can Chase Wealth Solutions help with your pension?
We can advise on;
• Setting up a new, or review your existing, company pension scheme
• Setting up a new, or review your existing, individual pension
• Whether your existing pension is appropriately invested
• The retirement options available to you
• Whether a transfer to a new pension scheme is suitable or not
• A sustainable withdrawal rate in retirement
As well as our extensive experience in investment and pensions advice, we use sophisticated cash flow modelling to help forecast your financial future.
What is a pension?
• A regular savings plan that you build up for your retirement
• You (and/or your employer) make regular (or perhaps single) contributions
• You receive tax relief on the contributions at 20%
• Typically, your contributions are then invested into one or more investments
• The investments will grow tax efficiently within your pension
• From your pension scheme’s normal retirement age, you can access your pension savings (you don’t even need to retire from work)
• When you access your pension, you are entitled to a tax-free lump sum at the start up to a prescribed limit
• Thereafter the income is taxable as your earned income
We can explain what pension options you have, help you start (or re-start) a pension, ensure it is appropriately invested in line with your attitude to risk and advise on what level of savings you should be making to meet your retirement goals.
What are the different types of pension schemes available?
There are two main types of pension schemes; Defined Contribution Schemes and Defined Benefit Schemes.
Defined Contribution Schemes
The most common type of pension scheme is a Defined Contribution Scheme (or sometimes called a Money Purchase Scheme). The main features are;
• You (and/or your employer) make contributions, ‘defined’ by you (and/or your employer)
• The value of the pension is linked to the value of the underlying investments within the pension
• There is usually no guarantee of what you might receive at retirement, although you may be able to buy an annuity (a form of fixed income) from your pension provider if your pension provider offers them
• If an annuity is not an option, the ‘income’ that you can take from your pension will depend on which jurisdiction the scheme is registered in and under which legislation the scheme is written.
• Any remaining value in your pension can usually be passed on to your beneficiaries
On the island there are two pieces of legislation that govern Defined Contribution Schemes; the 1989 scheme rules (the old-style scheme) and the 1961 scheme rules (confusingly, the new-style scheme – the Pension Freedom Scheme ‘PFS’).
The main features of each are outline in the following table;
Some important points to note;
• There will be a 10% charge if you wanted to transfer from the old-style scheme to the new PFS made by the IOM Treasury
• The PFS cannot accept direct transfers from UK pension schemes
• The PFS cannot accept direct transfers from Defined Benefit Schemes
Other things that you should bear in mind;
• Under current legislation you may be able to access your old-style pension scheme in full where the value does not exceed £100,000 under the Isle of Man Trivial Commutation rules
• Furthermore, if your old-style pension scheme value does not exceed £142,850 you may be able to access it in full under the Isle of Man Remnant rules
• If you have a UK personal pension, then the ‘tax-free’ cash is not ‘tax-free’ for Isle of Man residents. A transfer to an Isle of Man personal pension may therefore be appropriate
We can help you navigate through the options available and what might be most suitable for you and your circumstances to achieve your goals.
Defined Benefit Schemes
A Defined Benefit Scheme (or sometimes called Final Salary or Career Average Revalued Earnings ‘CARE’ Schemes) are the other main type of pension scheme. The popularity for companies to offer these types of scheme has significantly reduced over the years as they are expensive to run for the employer. The main features are;
• Your employer may require you to make a defined level of regular contribution
• Rather than the pension having a value to determine the level of income in retirement, the sponsoring employer promises to pay an income from the scheme’s retirement age
• The promised income can be determined in a number of different ways but will usually be based on the number of years you have been an active member of the scheme and the scheme’s accrual rate (such as 1/30th, 1/60th, 1/80th etc)
• Schemes can then base the calculation on your final salary (or variants of) or average earnings over the term of your membership
• The income paid during your retirement will usually increase annually, roughly in line with inflation, and is tax as earned income
• Usually on your death there is no value to pass on to your beneficiaries, although your spouse or dependents may be entitled to a reduce level of pension income
• ‘Hybrid’ schemes are also available, combining Defined Contributions Schemes and Defined Benefit Schemes
We can review whether your Defined Benefit Scheme pension will meet your objectives in retirement and what options you have.
How much can I contribute to my pension?
• The maximum contribution you can make to all your approved Isle of Man pension schemes is the lower of ‘relevant earnings’ or £50,000 per annum to receive tax relief
• This applies to the total of employee and employer contributions
• A 40% tax charge applies to any contributions over £50,000 per annum
• ‘relevant earnings’ does not include dividend income, foreign income, rental income, investment income etc
In April 2016 the UK and the Isle of Man agreed to no longer combine the contributions made in each jurisdiction towards their respective State Pensions. This is actually quite good news for some of us!
Firstly, what is the State Pension?
• A weekly guaranteed pension benefit provided by the State (UK and/or IOM)
• You must have sufficiently contributed towards the State Pension by way of paying National Insurance (NI) contributions
• You need to have a minimum of 10 years contributions credited to you to receive anything
• You need to have 35 years contributions credited to you (under the single-tier State Pension) to receive the full State Pension
• The single-tier State Pension was introduced in April 2019 for IOM residents and April 2016 for the UK
• Your State Pension will increase each year, roughly in line with inflation
• State Pension age is currently 68 for anyone born on or after 6th April 1978
The State Pension should be considered an important part of your retirement planning, but it will unlikely be enough on its own to provide you with sufficient retirement income.
UK State Pension for IOM residents
If you have a minimum of 10 years paid NI contributions in the UK, you may be able to claim a UK State Pension in addition to your Isle of Man State Pension.
If you haven’t, or wish to try and improve your UK State Pension entitlement (to a maximum of 35 years), you may be able to pay voluntary NI contributions, or even buy back incomplete years.
• You must have a minimum of 3 years paid NI contributions in the UK to be able to apply to HM Revenue & Customs
• You can then apply to pay voluntarily on a monthly direct debit basis, or annually
• You may also apply to pay back incomplete years in single lump sum contributions
There is a very clear benefit of doing this, but it may not be right for you, or you may not qualify. The rates applicable may be subject to change, and the facility may not be available in the future.