All You Need To Know About Pension Rates

Last Updated: 23 Oct 2020
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The Impact Of Pension Rates

Whatever the type of pension you have right now, you need to be informed about changes of benefits and pension rates so you are able to increase the amount you will get upon retirement.

How Pension Rates Have Changed So Far

The world of pension rates is complex and nerve-wracking. Thank goodness for April 6, 2006 when the system in the UK underwent a major overhaul, which is known as the “A-Day”. The Inland Revenue1  simplified the rules about retirement income tax by discontinuing the annual contribution limits for your retirement. This has served to boost current pension rates.

Moreover, providers should now provide flexible options to plan holders concerning:

  • Investing and using their funds
  • Freedom to live anywhere in the world
  • Control to the way their funds are built up

Read our article about the new Pension Rules and minimum pension.

How Contributions Affect Your Pension Rates

Your pension rates would largely depend on the amount of contributions you are able to put into your fund. Previous rules allow individuals to save between 17.5% and 40% of your salary, depending on your age. Since A-Day, you are able to invest up to 100% of your annual salary, providing it does not exceed the limit of £215,000.

Issues Concerning Your Pension Rates

  • Tax-Free Lump Sum2  When your pension rates does exceed £15,000, you have the option of not buying an annuity and just taking it as a tax-free lump sum instead,
  • Retirement Age3  The minimum age for access to your fund is 55, as of 6 April 2010. You have the option of not availing this until age 75 if you have other income to support you.
  • Fund Size Old rules for taking a retirement requires individuals to take an equivalent of two-thirds of their final salary but with a limit of £70,400. This maximum fund size is now gone thanks to the A-Day changes.
  • Lifetime Allowance It is now valued at £1.8m, the maximum allowable limit as of 2010-11. If assets exceed this cap, you will get a tax for lifetime recovery charge at 55%.

Find out more about your UK Pension.

Protecting Your Benefits

If the value of your benefits would eventually exceed the lifetime allowance, you have to act quickly; otherwise, the charges you will incur might be double the value of your pension rates. You could do this by getting a primary or enhanced protection.Are you interested in company pension scheme? We have all the information for you! Check our detailed articles!

Primary And Enhanced Protections

Primary and enhanced protections are transitional strategies to provide protection for your assets and investments that might eventually exceed the required cap.

This is only applicable for funds built up before A-Day.

  • Primary protection is applicable for plan holders with expected increase in salary or investment profits
  • Enhanced protection is applicable for plan holders with predicted growth in salary or investment profits.

The majority of plan holders are not really affected by the changes in retirement income tax and annual contribution limits. But if you can foresee an unexpected growth in your fund, there is no way to avoid the lifetime recovery charge.

Your Guide To The Various UK Pension Rates

There are many overseas schemes available to use should you want to transfer your UK retirement plan to one of the tax free jurisdictions.4  As long as it is a government-regulated scheme with associated pension rates, then you are assured of having guaranteed income and benefits during your retirement years.

UK pension rates are dependent on the number of your National Insurance Contributions (NICs5 ) made during your qualifying years. The state pension age is 65 for men and 60 for women.

Types Of Credit

Pension Credit

Pension credit is the extra money you may be entitled to each week; it is made up of two elements, savings credit and guarantee credit. Pension rates: you are able to qualify for credit if you fall under one of these categories.

Guarantee Credit

If you are a UK resident and have reached the minimum qualifying age and you are on a low income:

  • You are single with a weekly income below £142.70
  • You are married and your joint weekly income is below £217.90

If you qualify for guarantee credit, you will receive:

  • If you are single, the difference between £137.35 and your total weekly income if it is less than this amount.
  • If you live with a partner, the difference between £209.70 and your joint total weekly income if it is less than this amount.

Savings Credit

  • If you are above 65, single and with a total weekly income is between £111.80 and £189.05
  • You and your partner’s joint weekly income is between £178.35 and £277.23

If you qualify for savings credit, you will receive:

  • If you are single, you will receive £18.54 a week.
  • If you have a partner, you will receive £23.73 a week.

Annual Increases

The annual UK pension rates will increase based on the average earnings growth of the individual’s contributions. The Secretary of State for Social Security announced that as of 9 April 2012, the increase would be 5.2%.

Making Sure You Get A Good Rate

A State Pension statement provides you useful information about your UK pension rates and all your possible benefits. It uses your National Insurance Contributions as a basis. On the other hand, the State Pension profiler can help you determine how much your funds are worth. Based on the information you have provided, you are able to find out how soon you can avail of the benefits as well as the changes that can affect your pension rates.

What Are Annuity Rates?

An Annuity is an investment you make like in an insurance policy. It guarantees a comfortable and regular income for life. Since you will retire one day, it is better to be prepared and with the current global recession, you have to be wise in choosing the right financial institution that will give you the best annuity rates UK so you can make the most out of your hard-earned money.

Your Annuity And Annuity Rates UK

An annuity is the amount of money you have paid to the insurance company (including its interest) divided by the number of your life expectancy years. You can benefit from having high annuity rates UK if you believe that your life expectancy years will outlive your lump sum. For example, you decided not to get an annuity and you have £30,000 worth of savings by the time you retire at 60. This would probably last just for a couple of years depending on your spending. But if you invested that same amount in an annuity, you can expect a guaranteed comfortable income for the rest of your retirement years.

Two Basic Types Of Annuity In The UK

There are two basic types of annuity in the UK; a compulsory purchase and a voluntary purchase (pension annuity and purchased life annuity, respectively). Whichever type of annuity you choose, your annuity rates UK will still depend on the performance of your investment from the financial institution that manages your fund.

Getting The Most Out Of My Annuity Rates

Because of the strict rules of annuities concerning transfers, surrenders, and changes, you have to make an informed decision to make sure your annuity rates UK will work for your favour. You can choose a single annuity or a joint annuity.

  • A single annuity guarantees high annuity rates in the UK but will cease the moment you pass away.
  • A joint annuity allows your beneficiaries to receive continuous monthly income even after you die.

Other Options To Protect Your Rates

Make sure that your annuity has a guarantee period so that your beneficiaries would still be entitled to the benefits in the unfortunate event of your untimely death. If both you and your spouse have a joint annuity then chose to get a guarantee period, you can also opt to have an overlap. It means your spouse can receive both benefits and guarantee payments simultaneously after your death. Without an overlap, your spouse will not be entitled to a pension until the guarantee period has stopped.

Transact with an insurer that can give an annuity protection. It offers to pay your remaining annuity payment balance should you die before the age of 75. Only a few companies give this kind of protection so you must decide whether it is worth having in your annuity benefits or not. There are a couple of things you need to consider carefully before you pay for an annuity. It is important to shop around for reputable financial institutions that can offer you with the best annuity rates.

What Is A Lump Sum?

As your retirement approaches fast, you will be faced with an exciting yet serious decision whether you should take the tax-free lump sum or not.

Under current provider rules, You can cash in up to 25% of your pension money which can be valued between thousands and hundreds of thousands of British pounds. This substantial amount presents plenty of fascinating options during a time when you want to enjoy this time of your life. Here is a helpful guide towards the advantages and disadvantages of taking your cash fund.

Benefits Of Taking A Lump Sum

Many benefits can tempt you into taking that lump sum from your fund.The top benefit for cashing in that lump sum right away is that it is free from income tax. It feels good to spend all that hard-earned money in any way you like it without having to share a big chunk of it with the taxman.

If you do not take advantage of it, your pension will also be subject to the same amount of tax that you are paying when you are still working. Another great benefit is having complete freedom as to how you want to spend it. You can spend it on the finer things in life, make your loved ones happy, or invest it in any business you like. If you think that you might survive longer than what you expect and your remaining fund would not be enough to provide a comfortable life for you, then you can always use a part of that lump sum to purchase a second annuity.

Drawbacks Of Withdrawing A Pension Lump sum

You lose a significant amount of regular income during your retirement years. If you are still strong and healthy, it is highly possible that you will live longer than you think and you need all the money from your savings to sustain a comfortable lifestyle for your old age. Buying an annuity with your lump sum when you realize that you need it now is more expensive. It does not guarantee enough income to last for the remaining years of your life.

Getting A 100% Lump Sum

Even if advisers strongly suggest this, most providers do not allow it. You can only get as much as 25% pension lump sum because the remaining amount will serve as your lifetime regular income. This is a good strategy because it provides security and comfort during your retirement years, especially when you have no other means of income-generating activities.

It also takes away the big possibility of ‘squandering’ your money away in a short time. Besides, you could be given a 55% penalty from HMRC even if you have already been a resident of another country for more than 5 years (which is why a QROPS is often a great option.)

Check this review about is equity release a safe option

John lawson rndlg

John Lawson

John advises business, individuals, and organisations on pension planning. As you’ve probably realised by now, we’re invested in helping people like yourself understand a little bit more about how equity release options work.

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