Robert Smith Management Ltd Pension scheme consultancy and management

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1 Robert Smith Management Ltd Pension scheme consultancy and management major pension changes explained February 2015 V1.0 1

2 Welcome In March 2014, the Government announced the most radical changes to our pensions for almost a century. Retirees will be free to take all their savings in one go, whenever they like, and no-one will be forced to buy an annuity. The new era of pension freedom, being introduced in April 2015, aims to put you in control of your pension with more options and greater flexibility with your savings than ever before. This, however, could make planning your retirement even more complicated. This is not just your company or your private pension that's changing - there are also major reforms to the state pension on the way. So, we are here to help. This plain English guide explains these significant changes to your pension, explores how to maximise your retirement income, and what your tax bill might look like if you cash it in. Before you decide what to do with your pension savings, read through this booklet and then speak to Robert Smith Management. We promise to lead you to a healthy financial future. Don t take our word for it, read some of our client testimonials at 2

3 Inside 4/5 The great pensions shake up 6 Pension freedom from April Annuities 8 Income drawdown explained 9 Small pensions unlocked 10 Consolidate your pension 11 How to maximise your pension 12 How much tax will you pay? 13 The state pension changes 15 The new flat-rate state pension 16 Defer your pension for extra payments 17 Don't miss out on pension credit 18 Working in retirement 19 State pension and tax 20 Bridging the gap between saving and retirement 21 Passing on your pension benefits 22 Jargon buster 23 Contact 14 State pension timeline 3

4 The great pensions shake up Private and occupational pensions are set to change dramatically over the next year or so. Here we explore the changes and what you should do to get the best pension. Where can I get help? As part of the changes, all retirees will be offered free, impartial and high-quality guidance on how to get the most from the choices they will now have. This will be delivered by the Money Advice Service and The Pensions Advisory Service. The government has also launched a web site at This free guidance will offer you the chance to speak with an adviser, either face to face, online, or over the phone to discuss your options at retirement, and the consequences of different decisions - including how they will affect your family. It will also provide clear next steps and appropriate signposting to further sources of information or advice. It won't recommend financial products or providers. If you think you will need more help, you can give us a call. Some of the changes announced in March 2014's Budget took effect immediately, while others are scheduled for The pension reforms apply to most people with a pension, but are more relevant for those with a defined contribution (also called money purchase ) pension. With these types of pensions. you build up as large a pension fund as possible to save for your retirement. This guide covers only defined contribution/money purchase pensions. The changes affect individuals who are members of an employer s defined contribution scheme or those saving in a personal pension from their own bank account. Either way, the changes fall into three categories. 4

5 1 You won't be forced 2 A boost for income to buy an annuity drawdown An annuity is an investment where you pay a lump sum (such as your pension fund) to an insurance company in exchange for an income payable for life, or for a set period. Once you buy an annuity you can t get your original investment back as a lump sum. While annuities provide a guaranteed income in retirement, the products have become a major source of frustration for many pension savers. With the incomes on offer falling sharply in recent years, and no chance of leave anything behind for your family, many people have had no choice but to buy an annuity, but the new rules will remove this compulsion. This means that you can take your pension savings out in part or in full if you wish, subject to income tax. And tax rules for annuities will change too, which will make them much more flexible. This flexibility will allow you to vary the amount of income you take; take lump sums out of them, and even leave the remainder of your fund to your family after you die. Income drawdown is the retirement arrangement that currently represents the main alternative to buying an annuity. Rather than cashing your pension fund in and using money to buy an annuity; with income drawdown you continue to invest the money and draw an income directly from your pension fund. The hope is that the investments in your pension fund will continue to grow. Drawdown plans have become increasingly popular with savers keen to avoid falling annuity rates, but there are a number of restrictions and limits that can make life difficult for those who take this route. The reforms have already raised these limits, and eventually they'll be removed altogether. Take small pension 3 funds in cash Cashing in small pension funds is known as trivial commutation'. The rules were originally designed for savers with very small pension funds for whom an annuity purchase would produce only tiny amounts of income. These rules allowed such savers to take their funds as cash instead. However, given falling annuity rates, the qualifying thresholds for trivial commutation had begun to look far too low. The reforms include a response to this issue higher thresholds mean a significant increase in the number of people for whom this is an option. 5

6 Pension Freedom from April 2015 The reforms will give you more freedom, so it is important to understand the rules to make sure you get the best from your pension fund. While the government has already made some small changes, giving you more time to decide about buying an annuity, and allowing people in income drawdown to take more income, and also reforming the rules around small pension funds, April 2015 is when the reforms really kick in. On 6 April 2015, the government will allow all savers in both defined contribution and defined benefit pension schemes to have full access to their pension funds. This will pave the way for savers to enjoy complete freedom about how they use their pension funds to generate an income in their retirement. How will pension freedom work? The reforms mean that you will be able to transfer some or all of the money out of your pension fund and use it as you choose. This means you won't have to go into drawdown to take your money as income, or buy an annuity, although you can still do this if you want to. What will I need to watch out for? Anyone not buying an annuity will have to be sure they have a plan in place to make their savings last throughout their retirement years. This may mean having to keep your money invested throughout retirement. (Our living in retirement planning service will help you do this). Since no-one knows how long they will live in older age - or how their health may change - this isn't straightforward, particularly given the uncertainties of investment markets. For these reasons. many pension experts predict that significant numbers of people will still opt for an annuity in retirement. And the new pensions freedom does not come without some problems. Withdrawing large lump sums from your savings could come with a hefty tax bill. We've got more information on the tax you'll pay on page 12. Your current pension plan might let you draw all or part of your savings, or you may need to transfer it to a new provider that will let you do so. It's worth checking with your pension provider, be it your employer or the insurance company that runs your private pension, to see what rules they'll have in place. 6

7 Annuities One of the biggest frustrations for retirees has been that they've been forced to buy an annuity at a time when the amount of income they pay has been falling. With an annuity, you exchange your pension savings for a guaranteed income that's paid for the rest of your life, or for a selected period. How much income you get depends on your age, where you live and your health. It can also change depending on whether you want an income to be paid to your spouse after your death, or if you want your income to rise each year with inflation. If you haven t chosen a spouse s income; when you die, the money is kept by the annuity provider and can't be repaid to your family. When the Chancellor announced his sweeping reforms, he said that retirees would no longer be forced to buy an annuity. The share prices of annuity providers fell instantly, with many suspecting that annuities would no longer be the go-to product for retirees. More flexible annuities However, the new rules could make annuities a lot more flexible and attractive for retirees. The government is changing the rules so that: 1. Annuities could vary the amount of income they pay For example, this could allow you to take less from an annuity when you start to receive the state pension. You may also be able to take larger sums later on in your retirement, perhaps to help pay for long-term care. 2. You will be able to take a lump sum from an annuity At the moment, once you buy an annuity, you get paid an income from it with no further lump sum withdrawals. New rules will allow you to take a lump sum from an annuity, provided you agree to this when you buy one. 3. Your family could be paid from your pension after you die Guaranteed annuities pay out to your beneficiaries after you die, but this usually only lasts for up to 10 years from the date you bought the annuity. You'll now be able to buy an annuity that's guaranteed for life, so that your remaining pension fund is returned to your family when you die. And your family could receive this as a lump sum. if it's under 30,000. Should I still buy an annuity? The advantages of annuities certainly shouldn't be ignored. They pay a guaranteed income for life, so if you buy one, you won't have to worry about running out of money in your later years. And the new rules mean that many of the problems that people have had with their inflexibility could change. None of these 'new' annuities exist yet, and it will pay to shop around for the best deal if you choose to buy one, instead of simply taking the one that s offered by your existing pension provider. 7

8 Income drawdown explained Income drawdown is currently the main alternative to annuities and there is more than one type of arrangement. With income drawdown, you leave your money invested and draw a regular sum. There are no guarantees your pension fund will last the rest of your life - you must be happy to take that risk - but the freedom to stay invested brings the potential for higher returns. There are currently two types of income drawdown - capped drawdown and flexible drawdown. Capped drawdown Capped income drawdown places a limit on how much income you can draw from your pension fund, in line with rules set by the government. Since the March 2014 pension reforms, the maximum you can take is roughly 150% of the amount you would have received had you bought an annuity (it was previously 120%). All change in April 2015 In April 2015, the distinction between capped and flexible drawdown will come to an end, with everyone in a drawdown plan entitled to take as much as they like, when they like. That may sound attractive, but you will need to think carefully about how to invest your pension savings. Will you switch into assets that generate an income, or sell off assets over time to produce the cash you need? And where will you invest your money? Drawdown plans have been made much more flexible by the Chancellor's reforms, so it's worth spending some time researching investment strategies and seeking guidance to make sure you get the best deal. This maximum figure is set by the Government Actuary's Department (GAD) and is designed to stop you withdrawing too much money too soon in retirement. Flexible drawdown By contrast, flexible drawdown allows you to take as much income as you like each year. To be eligible for this you must already have a guaranteed minimum pension income of at least 12,000 a year from other sources. 8

9 Small pensions unlocked Pension savers with smaller sums now have greater freedom. Savers with small pension funds have always had the option of taking them in their entirety as a lump sum, rather than having to use them to buy an annuity. However, this concession, technically known as 'trivial commutation, is now being made more generous. Lump sums Before the 2014 Budget, you could take your entire pension savings as a lump sum but only if the total of all your pension funds was no more than 18,000. If they exceeded 18,000, you could take any single fund worth less than 2,000. Between 27 th March 2014 and 5 th April 2015, these limits increased, and after 5 th April 2015 will lift altogether. From 5 th April 2015 onwards. these limits will no longer apply, because savers will then have the option of exercising their right to complete pension freedom, however large their pension funds. Tax free In practice, you will need to consider how much tax you will pay. You're entitled to take up to 25% of these sums as tax-free cash, but there may be tax to pay on the rest of your pension savings depending on your personal circumstances and how much your pension fund is worth. 9

10 Consolidate your pensions Should you transfer your savings into one easy-to-manage pension plan? Many people reach retirement age with several different pension plans. For example, you may have accumulated pension savings with several different employers. While you can use each of these pension funds separately in retirement, for example buying an annuity with each of them, it can be complicated to keep track of different pools of savings. And if you want to take advantage of the Budget pension reforms, having all your money in one place may make continuing to invest the money more straightforward. A single provider Many savers choose to consolidate their different pension plans by transferring them to a single provider. Not only can this simplify pension planning, but it can also benefit savers who might find that plans they opened years ago, but no longer contribute to, are festering in poorly performing funds. Start by making sure you have a complete list of all the pension plans you own - both with employers past and present - and any individual plans that you may have opened. Then check carefully to see what charges would be payable in order to transfer each of these funds, and then think about where to unite them. Pension transfers can be complex, so you should seek professional help. Tip You might not be able to remember all the pension plans that you ve paid into over the years, but the government s Pension Tracing Service can help you find lost plans. Call

11 How to maximise your pension Investing your savings well will make a huge difference to your retirement income. Whether or not you decide to buy an annuity, the single most important factor in determining your retirement income will be the size of your pension fund, and a lot depends on how well your money s been invested over the years. Review your pension investments regularly in order to ensure you're generating the best possible return on your savings. Your options are wide-ranging, depending on the amount of risk you want to take. Really getting to grips with these options represents your best chance of boosting your income. These options include the following: The stock market Historically, over long-term periods, shares have outperformed most other asset classes. For this reason, stock market assets are the bedrock of many savers' pension investments. In the short term however, shares can be volatile as they can fall in value as well as rise. Fixed income assets Organisations ranging from governments to companies issue bonds, which pay a fixed level of income and promise to return investors' capital on a set date in the future. Bond prices can rise and fall but tend to be less volatile than shares. Property Many savers see property (including buy-to-let) as key part of their pension assets. Property certainly has the potential to generate good returns. but it can fall in value too. Cash Cash savings offer certainty - your money can't fall in value, however, returns tend to be lower, and recently cash hasn't even kept pace with inflation. If you decide not to buy an annuity with your pension savings, then all of the above investment options will continue to be open to you in retirement. That gives you the opportunity to take advantage of the pension reforms - but while you may be keen to go on generating strong returns on your savings, be mindful of how much income you'll need to draw from your pension fund, as well as the fact that the money may have to last for the rest of your life. 11

12 How much tax will you pay? The new rules include tax charges that could hit many savers, so make sure you understand the regulations in order to avoid getting stung. Pension Freedom Complete pension freedom will appeal to a great number of savers, but the question of tax will be a significant factor in how you plan for retirement. If you opt to take your pension savings in cash, you'll need to be particularly aware of this to avoid a large tax bill. Under the new rules, 25% of your pension fund can be withdrawn as a taxfree lump sum, which is no different to the old rules. However, from April 2015, if you wish, you could withdraw the entire fund in one go with 25% being tax free and the remaining 75% subject to income tax. What tax will I pay? What tax you will have to pay depends on a number of factors including the size of your pension fund and any additional income you may have. But in practice, anyone withdrawing a substantial amount in one go risks having to make a substantial payment to HM Revenue & Customs. As the table below shows, the effective tax rate may be above 30% for some savers. In order to avoid a high tax bill, people with large funds may need to stagger their pension withdrawals over several years. Those with smaller funds - and less significant tax exposure - might still be able to take the full pension fund without paying higher rates of tax. However, others are more likely to take money out in smaller chunks. How much you take out your pension 25% tax free lump sum value The amount you ll pay tax on Tax free allowance Tax rates applied Total tax bill Effective tax rate 20,000 5,000 15,000 10,000 20% x 5,000 1,000 5% 40,000 10,000 30,000 10,000 20% x 20,000 4,000 10% 100,000 25,000 75,000 10,000 20% x 31,865 40% x 33, , , , % x 31,865 40% x 118,135 45% x 225,000 19,627 20% 154,877 31% These figures are only a guide and may not match your personal circumstances. If you are drawing money from your pension, you should check the tax position with your accountant. 12

13 The state pension changes State pensions are also being overhauled, changing the benefits to which almost everyone is entitled. Basic state pension The full basic state pension is a week in the tax year. To get this, you need to have built up at least 30 years' worth of National Insurance contributions. If you've paid in less than this, your basic state pension will be proportionately lower. Additional state pension Depending on your employment status, you may also have been paying towards an additional state pension. This has been called several things over the years - most recently, the State Earnings Related Pension Scheme (SERPS) or State Second Pension (S2P). The maximum you can earn from the additional state pension in the tax year is per week, taking the overall state pension to However, most people receive far less than this. A longer wait for state pension income The other big reform to state pensions is a steady increase in the age at which you may claim your state pension. Part of the story is that the pension age of men and women is slowly being equalised: women's state pension age is already rising and by 2018, it will be 65, the same age as currently applies to men. In addition, the state pension age is rising for everyone. By 2020, both men and women will have to wait until age 66 to claim their state pension and by 2026, the state pension age will rise to 67. In the longer term, the ages will rise even further - to 68 during the 2030s, with further rises after that likely if average life expectancies continue to increase. People, on average, receive around 30 extra per week - and many savers have in the past contracted out of the additional state pension: they then get no additional state pension credits while contracted out, receiving instead additional pension from their workplace or personal pension scheme. Moreover, the additional state pension's days are numbered. Under reforms to the state pension arriving in 2016, if you reach state pension age after this date you'll receive a flat rate - worth 152 in today's money (see page 15 for more details). 13

14 State pension timeline State pensions are changing in different ways, with several reforms now imminent. April 2014 Women's state pension age rises to 63 (previously 62.5). October 2015 You'll be able to buy Class 3A voluntary National Insurance contributions to boost your state pension by up to 25 per week. Price will vary according to your age. April 2016 Single-tier state pension system starts. You'll receive a flat-rate amount, currently 152 a week in today's money, in addition to any second state pension you've accrued prior to Pension income increases The government has recently committed to continue what it calls the 'triple lock'. This guarantees that the basic state pension will rise each year in one of three ways: inline with inflation, in line with average pay increases, or by 2.5%. The Government promises to choose the measure which produces the biggest pension increase. This should protect the value of the state pension at a time when many wages are falling behind prices. Check your likely state pension by getting a state pension statement from the Pension Service ( ). Based on your National Insurance contributions record, this shows how much basic state pension entitlement you have built up, and what additional state pension you have accrued. 14

15 The new flat-rate state pension State pensions are also being overhauled, changing the benefits to which almost everyone is entitled onwards From 2016 onwards, the state pension system will be far simpler, with a single, flat-rate payment based on the National Insurance contributions you have made. If you make 35 years' worth of National Insurance contributions you could receive a maximum of 152 per week in today's money. If you make fewer, you'll get proportionately less. You'll no longer contribute towards the additional state pension. The new system While the new system is simpler, it will have to operate alongside the current system for many years. Many employees have built up significant additional state pension entitlement over their working lives, and the government has announced a complex system of rules for an extended transition period. These seek to ensure that no-one will lose any additional state pension they have already accrued, which would combine with their basic state pension entitlement (under the current system) to give them more than the new flat rate. If you haven't reached state pension age by April 2016, the Department for Work and Pensions will make two calculations: 1) The first will be your state pension entitlement under the current rules. 2) The second will be the amount of state pension you will be entitled to under the new post-2016 rules. Whichever value is the highest is called your 'foundation amount'. If this is more than the maximum flat-rate pension of 152 a week, you'll get the higher figure. This means that if the additional state pension you've built up is higher than you would get under the new flat-rate rules, you'll still be entitled to get that higher additional pension. The new rate of 152 applies to you only if you reach state pension age on, or after 6 th April If you're already drawing state pension or will get access to it before that age, you'll continue to receive basic state pension, plus any additional state pension you're entitled to. For many, this is considerably less than the flat rate paid to those who retire later. Pension top-ups for existing pensioners Existing pensioners will be able to boost their state pension by up to 25 per week by making additional National Insurance contributions. These Class 3A National Insurance contributions must be made as a one off payment. In exchange, you get a higher state pension income for life, which is linked to inflation. The offer to do this is open from October 2015, and will run until April See: 15

16 Defer your pension for extra payments If you can afford to wait before taking your state pension, you could be much better off over the longer term. Want to boost your state pension by 10% a year? Deferring the date at which you begin drawing your pension, or stopping drawing it for a period, could enable you to do exactly that. You have to defer the whole amount, including any additional state pension you're entitled to. There are two options available: 1. Extra pension Under the current rules, your state pension will increase by 1% for every five weeks you defer. If you defer for a year, your pension will go up by 10.4%. This is how it works in practice: If you defer your state pension for three years, and you qualified for, say, a week (or 6,310 a year, the average in ) at the time of deferral, you'd get an extra 1,969 a year, increasing your weekly state pension to Is deferring a good deal The answer depends on how long you live: currently, you won't 'break even - that is, earn back the state pension you sacrificed by deferring - for 9.6 years after you start claiming it, regardless of how long you defer for. For men aged 70, the Office for National Statistics says average life expectancy is another 17.2 years, i.e. to 87.2 years. Women aged 70 today are expected to live another 19.5 years to 89.5 years. So, if you're in good health, the chances are that you'll be better off if you defer under the current pensions system. If you qualify for the new flat-rate state pension in 2016, you won't be able to defer to get the lump sum anymore. And delaying to get the extra pension will be far less generous at 5.8% rather than 10.4%, making deferral far less attractive overall. 2. Lump sum Alternatively, if you defer for at least a year, you can take any state pension you defer as a lump sum, instead of extra pension. The lump sum is the amount of state pension you would have received, plus interest at a weekly rate of 2% above the Bank of England base rate (currently 0.5%). If you're a taxpayer you must pay tax on it, but only at your existing rate. 16

17 Don t miss out on pension credit Crucial support to boost the state pension for those who need it will mostly continue to be available after the 2016 pension reforms, but you do need to claim for the money. If you need to boost your state pension, help is available. This support, known as Pension Credit, will continue to be available after the state pension reforms. In the year, if your income per week is below for a single person or for a couple, you could qualify for pension credit. It consists of two parts: guarantee credit and savings credit, though the latter is being abolished from How guaranteed credit works Guarantee credit, which will continue to be available after the 2016 state pension reforms, tops up your weekly income to for single people and for couples. To qualify you must: Live in the UK Have reached state pension age if you're a woman Have reached the state pension age of a woman born on the same day as you if you're a man Have weekly income below if you're single and if you're a couple. How savings credit works The government offers extra money to reward people for saving towards their retirement. To qualify you must: Have a minimum income of a week if you're single, and a week if you're a couple Be 65 or over (or your partner is) Be living in the UK Have made some provisions for your retirement, like savings or a second pension. For every 1 by which your income exceeds the savings credit threshold, you get 60p of savings credit. If, say, you have an income of a week from the basic state pension, and an income of a week from a private pension a total weekly income of your weekly income is 15 over the savings credit threshold, qualifying you for 9 a week of savings credit. The maximum savings credit you can get per week is for a single person and for couples. 17

18 Working in retirement Many people are now opting to work beyond state pension age, full-time or part-time, and the law supports your right to do so. Just because you have reached state pension age doesn't mean you have to give up work - many people choose not to, or have to continue working for financial reasons. The good news is, if you do decide to work longer, you're likely to take home more money because you don't pay any National Insurance when you're over state pension age. If you continue to work past state pension age, you can still receive your state pension in addition to your earnings. Alternatively, you can choose to defer your state pension and claim more at a later date (see page 16). Retirement law has changed The UK's default retirement age, formerly 65, has been abolished - most people can now work for as long as they want. Instead, your retirement age is when you choose to retire - most businesses don't now set a compulsory retirement age for their employees. It's your responsibility to discuss when and how you retire with your employer - it may even be possible to begin drawing some of your private pension benefits while reducing the hours you work. Ask your pension scheme managers what impact a change in working hours or income might have on your pension, and whether your scheme supports phased retirement or working beyond the scheme's normal pension age. Tip Think about going flexible If you decide you want to continue working, you may want to think about flexible working options. Flexible working describes any working pattern adapted to suit your needs. This includes reducing your hours to give you more personal time. If an employee chooses to work longer, they can't be discriminated against. However, some employers can set a compulsory retirement age if they can clearly justify it for example, if the role is clearly too physically demanding for an older person. 18

19 State pension and tax Income tax in retirement is the same as it is when you're working. You get a personal allowance - an amount you can earn tax-free - and pay tax on the rest of your income. Income Tax from private pensions is automatically deducted through the Pay As You Earn (PAYE) system. However, state pension income, including basic state pension and additional state pension, is paid without the deduction of any tax. When you start drawing state pension benefits, the Department for Work and Pensions will inform HMRC, which will start deducting any tax due via PAYE by adjusting your tax code on any private pension or other sources of income. So long as you have sufficient PAYE income to cover your tax liabilities, the system is automatic. However, it relies on HMRC knowing your income from all sources, including other pension income. Self-assessment tax returns For many people, retiring and claiming their pension can push them into completing a self-assessment tax return for the first time. If you're sent a tax return you must complete it for the relevant year, even if you have no tax to pay. There are strict deadlines for tax returns (for instance 31 st October for a paper return and 31 st January for online) and there is an automatic 100 fine if you miss these or get things wrong on the form. You will need full details of your finances for the relevant tax year. Common tax code letters and what they mean Your tax code tells employers and private pension providers how much tax to deduct from payments they make to you. Understanding your tax code allows you to check for mistakes. Common codes include: L - You get the basic personal income tax allowance ( 10,000 in ) -this letter normally applies to those born after 5 th April P - You were born between 6 th April 1938 and 5 th April 1948, and you qualify for a higher age-related allowance ( 10,500 this year). Y - You were born before 6 th April 1938 and you qualify for an even higher agerelated allowance ( 10,660 this year). BR - All income from this source will be taxed at the basic rate (20%). DO - All income from this source will be taxed at the higher rate(40%). K - You have untaxed income which is greater than your personal allowance. Your pension provider will deduct extra tax by treating you as if you receive more income than you actually do. 19

20 Bridging the gap between savings and retirement Pension benefits become available at different ages, depending on their source, so make sure you plan your retirement accordingly. Think of pension planning as a series of staging posts on a journey that requires you to build up your savings and then extract maximum value from them as you retire. At different times of life you'll have different priorities and different levels of access to your pension benefits. Private pensions in particular which you can draw earlier in life, may be a useful bridge between full-time work and retirement as you wait for your state pension to become available. By age, the key pension milestones are: Under 55 You are not allowed to draw any income from your pensions yet, but you receive tax relief on any pension contributions you make. AGE 55 You can begin to draw an income from your private pension. You can also take 25% of your pension savings as a tax-free lump sum. AGE 62 TO 65 Age 66 Born between 5 th April 1938 and 6 th April 1948? Your tax-free allowance is 10,500 (depending on income). Age 75 You no longer get tax relief on pension contributions. Age 76 If you were born before 6 th April 1938, you continue to receive an age-related allowance of 10,660 (depending on your income). Age 80 Your weekly state pension increases by 25p for those aged 80 or above. This increase is an extra 13 over a full tax year. You can start to receive basic state pension and additional state pension. This is at 65 for men, and currently at just under 62 for women. The state pension age for women rises to 65 between now and Once you reach state pension age, you no longer pay National Insurance if you continue to work. 20

21 Passing on your pension benefits In certain circumstances your partner may be able to inherit some of your state pension benefits after your death. When you die, your widow, widower or surviving civil partner may be able to claim some of your state pension entitlements. First, they may be entitled to some basic state pension based on your National Insurance contributions if they have not already built up a full basic state pension on their own contributions record. In addition. if you have contributed towards an additional state pension - the state earnings-related pension scheme (SERPS) or the State Second Pension (S2P), your spouse or civil partner can inherit some of this additional pension - typically up to half, though possibly more if you were born before Find out more Go to look for the Downloads tab, and download our booklet entitled Pension & Death Benefits or for queries on passing on your state pension, contact the Pension Service helpline on Private pension From April 2015, the rules on inheriting private pensions are changing significantly. Normally annuities can't be passed on after you die, and that isn't changing. But for people who die under the age of 75 and haven't claimed their pension, it can be passed on completely free of tax to anyone they nominate. Previously, it could only be passed on to a spouse or dependant. This means children, or even grandchildren, could inherit the savings in your pension. For people aged 75 and over, there are two changes. Under current rules, a lump sum passed on was taxed at 55%. In April 2015, this will reduce to 45% tax, and the following year reduce to the income tax rate paid by the person inheriting the pension. 21

22 Jargon Buster Don't be daunted by financial jargon. We explain the most common terms and phrases in plain English. Basic state pension A weekly pension payment from the government. In the current tax year, the full basic state pension pays a week. Additional state pension A weekly extra payment on top of the basic state pension. You will receive this if you've been 'contracted in' to the state second pension during your working life. Flat-rate pension This is being introduced in April 2016, replacing the basic and additional state pension. It will pay 152 a week in today's money, although you'll need to have 35 years' worth of National Insurance contributions to receive the full amount. Private pension A personal or stakeholder pension plan that you've set up yourself or through your employer. Occupational pension A company pension scheme operated by your employer of which you become a member. Defined benefit pension Also known as final salary pensions. These are occupational pensions which pay an income to you directly, usually a percentage of the salary you earned when you were working. Defined contribution pensions These schemes, also known as money purchase pensions, are where you and/or your employer select an regular amount to pay into your plan (i.e. a defined contribution). In these schemes you save money into a pension fund which gives you access to a wide range of assets in which to invest the contributions. When you retire, you convert your savings into an income by buying an annuity or entering into income drawdown. Annuity A financial product that you purchase with your pension savings, which pays you a guaranteed income for the rest of your life. The amount you receive depends on how much you have in your pension savings, your age, health and where you live. Capped income drawdown An alternative way to get an income from your retirement savings. Your pension stays invested after you retire and you draw an income from it in line with government rules. It s capped at 150% of the amount you could have received had you bought an annuity. Flexible income drawdown Another alternative to annuities. Flexible drawdown allows you take all of your pension savings out without a cap, or even in one go. You need to already have a minimum annual pension income of 12,000 to qualify. From April 2015, everyone will be able to access their money in this way. Pension credit Financial support for people with low incomes in retirement. There are two types - guarantee credit and savings credit. Self-assessment This is the process of filling in a tax return. You may have to start doing this once you retire and you begin claiming the state pension. Trivial commutation The technical term for taking small pension savings out in cash. If your total pension savings are 30,000 or less, you can take it all in cash. You can also take three funds worth 10,000 or less in cash. Assets Different places you can invest your pension contributions to give them the opportunity to grow. These assets include shares (sometimes called equities), fixed income (bonds and gilts), property and cash. 22

23 Contact Horton Place, Saxilby, Lincoln, LN1 2GW Web site Further information about our products and services, and some useful booklets, can be found on our web site. Look for the Downloads tabs under Corporate Services and Private Clients. Partners To compliment the services offered by Robert Smith Management, we work in partnership with a range of organisations including, accountants, solicitors, independent financial advisers, discretionary fund managers, trust specialists, chartered surveyors and corporate financiers etc. all adding value to our clients experience with us. Together we make a great team. 23