The New Pension Rules: What You Need To Know
The UK government launched its new pension rules in 2006. Knowing about them will help you plan and invest for the future. It will help you invest wisely so that you have a comfortable income during retirement.
Pension rules for personal accounts aim to provide more protection to moderate and low earners. It includes:
- Renaming personal schemes as “NESTs”
- Employers are now required to contribute to the fund of the worker.
Why New Pension Rules?
New pension rules are being applied to adjust to the ageing population of the UK. It means there are fewer people in the working force that are paying the state taxes. Because of unstable employment conditions, decreased value of the Pound Sterling, and other recession-related causes, pension rules are required.
New Pension Rules Application
- Those who are already receiving benefits from the state have the least to worry about
- Women will have to wait until they turn 65 (by 2020) to avail benefits from the State
- Anyone born after 1959 will be affected by the reform about State Pension Age (SPA1 )
- New rules concerning the calculations of the State Second Pension (S2P,2 formerly SERPS or State Earning Related Pension Scheme3 ) will give way to increased benefits for moderate and low earners
Pension Rules Concerning Personal Accounts Or NESTs
As of 2012, any worker who does not have a proper occupational scheme is automatically enrolled in a personal account or NEST. The state has made this reform to encourage employees to plan for their retirement. You have to contribute at least 4% of your salary each year. Your employer is required to match it, in which case, the total amount is a minimum of 8% annually.
You have the option not to avail this type of scheme but if you are eager to be part of it, you can contribute for as much as you like. Just make sure it does not go beyond the annual contribution limit of £3,600. As for the annual fees, the government wants the employees to pay no more than 0.3% of the fund or NEST. Compared to other types of schemes in the UK, plan holders pay as high as 1.5% charges each year.
An independent board will oversee the central administration of NESTs. They will determine the types of investment portfolios the funds will be used. Though it will not give you any freedom to select the business opportunities you want your money to be invested, A NEST is still your best financial option if you are weighing its advantages over other conventional schemes.
You can read more about it at this here. You can also contact us and talk to our reputed financial adviser so that you know how the pension rules will affect your retirement.
Pension Rules About A Minimum Pension
A guaranteed minimum pension is paid out to employees who have made National Insurance Contributions (NICs4 ) to their State Earnings-Related Pension Scheme (SERPS) but have contracted-out. The covered period is from 6 April 1978 to 5 April 1997.
Pension Rules About Contracting-Out
Contracting-out is the act of leaving the State Earnings-Related Pension Scheme (SERPS), currently known as State Second Pension (S2P), and joining a personal, stakeholder, or occupational scheme instead. The amount they will receive when they reach the qualifying State Pensionable Age is called the minimum pension. Make sure you are well informed before getting a private pension plan! Luckily for you we have all the information you need!
Pension Rules About Eligibility
You are eligible if:
- You are receiving pension services from 6 April 1978 to 5 April 1997 as a member of the Local Government Pension Scheme (LGPS)
- Your deceased spouse or civil registered partner receives retirement services from 6 April 1978 to 5 April 1997
- The services you get from the LGPS spans April 1988. The amount of your pension scheme will depend on the Pre and Post 88 computations.
How To Calculate Your Minimum Pension
The Department for Work and Pensions (DWP) is responsible for calculating what you will get in this scheme. You can receive the notifications of the amount along with your State benefits. The DWP will also notify the fund for the calculations. You will find the tabular column here very informative.
Retirement Fund Values
The value that contracted-out employees will receive from this scheme is more or less the same as what they would get if they did not ‘contract out’ of the scheme. It can also come in the form of rebate from their National Insurance Contributions, which means they can now pay less than what they were required to before. The money they will receive will come from their current scheme (personal, stakeholder, or occupational) rather than the State Earnings-Related Pension Scheme (SERPS) or the State Second Pension (S2P).
Increases To Your Funds
When you have contracted-out of the State Second Pension (S2P), you will be given a ‘Guaranteed Minimum Pension as Date of Leaving Service’. Your scheme will receive an accumulated increase from your current scheme. This would start on your Date of Leaving Service up to pensionable age.
It will be based on an interest rate called the ‘fixed rate revaluation’.5 The compound interest is computed between the day you have contracted-out and your qualifying age. It is important to have knowledge how to find the Best Plan that is right for you.
Your Minimum Pension During State Retirement Age
- The DWP will give you upon your state retirement age the necessary annual increase on this scheme, depending on what you have earned before 6 April 1988.
- The fund will give you a maximum of 3% annual increase in your pension fund after 5 April 1988
- If the annual increase is greater than 3%, then the remaining percentage you are entitled to will come from the DWP.
Minimum Pension Upon Death
Your spouse or civil registered partner will receive 50% of funds upon your death. For female members; however, this rule will only apply to funds paid out after 6 April 1988.
Calculate Your Retirement Savings
If you want to find out the amount of funds upon retirement, then you need the our calculator. This personal financial tool will help you calculate your savings during your working life.
Who Needs A Retirement Calculator
- Employees who have an employer’s scheme like a money purchase plan or a final salary scheme
- Self-employed or working individuals who contributes into a personal plan or a stakeholder scheme
- Those who have several savings arrangements from previous work experiences
- Those who have a combination of a deferred scheme and a paid-up occupational plan
- Anyone who does not have a plan yet
Using A Savings Calculator
- Enter the correct gross and net amounts (before or after the tax relief’s basic rate).
- For those who have a personal or stakeholder plan, contributions are paid ‘after tax relief’.
- For employer-employee contributions, the employer pays a ‘gross’ contribution while the employee pays a ‘net’ contribution.
You can use these tools to calculate what your funds are worth.
Your Retirement Scheme
Getting your expected retirement fund based on what you found out from your calculationsall depends on thequality of service that your provider offers you. Here are several key questions you need to ask to know if you have the right personal plan that would work best for your situation. You can read our article with all the important details about the HMRC.
How Does It Perform?
It is important to find out how well your provider invested your money. Usually, you will receive an annual report about your fund’s current worth and its projected amount if you continue your regular contributions. This way you can know whether the amount you get from your calculation is attainable or not.
How Flexible Is It?
Make sure that your financial provider offers flexible conditions when you decide to stop making payments or when you make irregular contributions.
Are The Charges Reasonable?
If the charges from your provider exceeds than what you are actually saving, then it is hard to make progress. If this is the case, then it is never too late to look for another plan that fits your lifestyle and working situation.
Would There Be Any Commission Fees?
To avoid commission fees, transact directly with the provider. But first, you need to talk to a reputable IFA before doing so.
Do The Rewards Outweigh The Risks?
Your fund is subject to financial risks, market fluctuations and other factors. You need to be aware that there are external factors that will impact the growth of your money. Before you start using the calculator, you need to determine your current lifestyle and working situation.
Come up with an estimate of the amount you want to have at a specific retirement year of your life so you can calculate how much you need to save. It is important to know your required retirement income to have a reasonable idea of the ballpark figure you need to put into a plan – you also need to be aware of the pension rules to make sure that you aren’t penalised at a later stage.
You can contact us and we will arrange a meeting for you to talk to our reputed financial adviser who will be able to discuss your UK retirement needs in detail.