guide to the new
April 2015
pension rules.
introduction
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the ‘pension revolution’
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what are the new pension rules?
3
how will the changes affect me?
4
the Interactive Investor SIPP
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pension jargon buster
6
introduction
1
the ‘pension revolution’
2
what are the new pension rules?
3
how will the changes affect me?
4
the Interactive Investor SIPP
5
pension jargon buster
6
2
what are the rules and how
could they affect you?
From 6 April 2015, the way in which you can take your pension benefits will change.
It’s been dubbed a ‘pension revolution’, the biggest shake-up in pension rules for
almost a hundred years and will affect everyone with a pension.
In this guide we’ll explain in general terms how the new pension rules work, set out the options you’ll have
– and what that might mean for you – and provide some valuable information on things to consider.
So whether you’re close to retirement, or just starting out in planning and saving for the retirement
you’d like to have in the future, you’re sure to find this guide a great place to start.
We’ve also included a pension jargon buster so you can get to grips with the terminology that you’ll
see in the media or receive from your pension provider.
When reading this guide please bear in mind that it’s a short and simplified summary of what can
be a complex subject, and does not directly relate to your own, personal circumstances. It is not
intended, or to be considered, as personal advice. So please do not make (or refrain from making)
any decisions based just on the contents of this guide. It is based on our understanding of the current
and planned pension and tax rules as at March 2015; these could change in future. Please bear in
mind too that the value of tax benefits depends on your individual circumstances.
If you are unsure about how the new pension rules could affect you and what action, if any, you
should take, please seek personal financial advice.
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introduction
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introduction
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an important note about pensions.
the ‘pension revolution’ – flexibility to manage your pension, your way9
Pensions are a long-term investment you make in order to provide yourself with the living standards
you want in retirement. Most people can only access their money from age 55. Up to 25% can then
usually be taken as tax-free cash. Subsequent withdrawals are subject to income tax.
what are the new pension rules?11
SIPPs (Self Invested Personal Pensions) are suitable for investors happy to make their own
investment decisions, without financial advice. (Of course, you can also work with an adviser then buy
and sell investments yourself, based on the advice received). They can run alongside other personal
pensions or an employer’s pension scheme but, as not all employers will make their contributions to
a SIPP, if you have access to an employer’s pension scheme you should always consider that first. If
you do not need the flexibility of a SIPP, you might consider a stakeholder pension.
Investments, and any income from them, can fall as well as rise in value so you could get back less
than you invest.
We hope you find this guide a useful starting point in planning for your ideal retirement, and would
be delighted to help you turn those plans into reality. Do keep an eye on the pension section of our
website for more information and updates.
change 1: retirement flexibility – it’s your money, you decide what to do with it11
change 2: pass on your pension tax-efficiently, or even tax free
19
change 3: guidance guarantee from the government
20
change 4: new retirement age
20
change 5: new rules for defined benefit pension transfers
21
change 6: new contribution limits once you are taking a pension
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how will the new pension options affect me23
the Interactive Investor SIPP – a pension that helps you make the most of the new rules27
pension jargon buster31
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introduction
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the ‘pension revolution’.
flexibility to manage your pension, your way.
When George Osborne stood up and delivered his Budget in March 2014 he introduced the most
radical set of changes to our pension system in almost a century.
The changes take effect on 6 April 2015 and everyone with a pension will be affected.
what’s changing?
The government is making private pensions much more flexible.
• You will have total flexibility over how you take money from your pension at retirement.
• You have the choice to take all of your money out as cash in one go.
• You will be able to pass on your pension to your heirs tax-efficiently and, in some cases, tax free.
This is great news if you are 55 or over and want to draw money from your pension: you can benefit
almost immediately, from 6 April 2015.
It’s also good news if you’re still some way away from retirement; the new flexibility makes private
pensions and SIPPs an even more attractive way to save for retirement.
So, if you have any type of pension now, or are thinking of taking one out, you’ll want to understand
how these changes affect you.
do the new rules apply to my pension?
The new rules apply to defined contribution pensions rather than defined benefit (or final salary) pensions.
Common types of defined contribution pensions include Personal and Group Personal Pensions,
Retirement Annuity Contracts, Stakeholder and Group Stakeholder Pensions, Money Purchase
Occupational Pension Schemes and Self Invested Personal Pensions (SIPP). You could have set it
up yourself or through an employer (past or present).
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You can check the type of pension you have on any statement or valuation you have received from
your provider. You can also read a simple explanation in the ‘Pension jargon buster’ section at the
end of this guide.
If you have a final salary or other type of defined benefits pension, please see page 25.
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the ‘pension revolution’
9
the ‘pension revolution’
6
what are the new pension rules?
change 1: retirement flexibility – it’s your money, you
decide what to do with it.
This is the most sweeping change the government is introducing.
From 6 April 2015, once you’re at least 55 you have total flexibility over how to take money from your
private pension.
How are the rules changing?
At a glance - current and new rules compared
How can you take money from your private pension? This table compares the options for most
people under current and new rules.
Before April 2015
After April 2015
Up to 25% tax-free cash
✓
✓
Guaranteed income (annuity)
✓
✓
Flexible income (capped)
✓
x
Unlimited withdrawals
x
✓
Ad-hoc lump sums
x
✓
Whole pension as cash
x
✓
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what are the new pension rules?
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what are the new pension rules?
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Current rules
New rules
Most people retiring under the current rules:
As before, you’ll still be able to take up to 25% tax-free cash. However with the rest of your pension
you have many more options. You can:
• take up to 25% of their pot as tax-free cash
• use the rest to buy a guaranteed income known as an annuity from an insurance company
It’s a simple solution, made particularly attractive by the fact you never have to worry about your
money running out (although its buying power will decrease over time). Despite this, many people
dislike annuities. Why could that be?
Firstly, because annuity rates have been declining over the past few years and the income they
provide has been disappointing.
Secondly, and perhaps most importantly, under current rules, you lose control over your money.
When you buy an annuity you are handing control of your pension fund over to an insurance
company who then pay you an income for the rest of your life.
If you live to be a 100, you’ll probably get back more money than you had at the start. But if you die early
it’s generally the insurance company that will keep your money. We say “generally” because whilst you
can arrange for annuities to continue paying your spouse or civil partner after your death, this results in
you getting a lower starting income. As a consequence most people don’t arrange their annuity in this way.
Rather than taking an annuity, a small percentage of people currently put their money into something
called an income drawdown plan. With this type of plan you keep your pension invested and take an
income from it as and when you need it. Under current rules for most people there are strict limits on
how much you can take out each year. Also, whilst it is possible to pass your pension on to someone
else when you die, they end up paying a punitive tax charge of 55% if it is paid as a lump sum.
From 6 April 2015 the current rules are going to be completely overhauled.
• take all the money out as cash in one go
• make unlimited withdrawals through a new type of income drawdown plan known as Flexi-Access
Drawdown – you can take as much as you want when you want it, as a monthly income, ad-hoc
lump sums or a mixture of both
• continue to take a guaranteed income via an annuity
• take a combination of the above options
Whichever option you choose, the money you take over and above the 25% tax-free cash will be
treated like income, so will be subject to income tax at your highest marginal rate.
How much tax could I pay?
The principle of income tax is simple: the more taxable income you have, the more tax you pay.
However, in the tax year 2015/16 most people will pay no tax on the first £10,600 (this is called the
personal allowance – the amount changes each tax year).
The table below shows how much tax most people will have to pay depending on their income. There
are exceptions, though. If unsure you should check the HMRC website or speak to an accountant.
Income
2014/15
2015/16
Tax rate
First £10,000
First £10,600
No income tax
Between £10,00 and £41,865
Between £10,600 and
£42,385
20% (basic rate)
Between £41,866 and £150,000
Between £42,386 and £150,000
40% (higher rate)
Over £150,000
Over £150,000
45% (additional or top rate)
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what are the new pension rules?
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What are people planning to do with their pension?
22%
5%
a. Guaranteed income
Security
Take all of it from the pension scheme but keep it invested
7%
Use some of it to buy an annuity and take the rest as cash
16%
Can be passed on
Other than the state pension or an income from a final salary pension, an annuity is the most secure
type of retirement income. It is guaranteed to never run out.
Keep the money invested in their pension
Use some of it to buy an annuity and keep the rest invested
Haven’t made up their mind as yet
There is no investment risk. You know right from the start what you are going to receive. Once set up,
it doesn’t change.
From ‘NEST Insight 2015’, published by NEST (National Employment Savings Trust), January 2015
The flipside of this security is a lack of flexibility. If your needs change, an annuity will not adapt.
How do the various options compare?
The best option, or combination of options, will depend on your needs and circumstances. A good starting
point is to look at the strengths and weaknesses of each.
At a glance – strengths and weaknesses of each option compared
After you’ve taken up to 25% tax-free cash, which option offers the best combination of benefits?
This table compares the strengths and weaknesses of each.
Security
Tax efficiency
This is generally provided by buying an annuity.
Buy an annuity
19%
Flexibility
Take all of it as cash
13%
19%
Risk
Risk
Flexibility
Tax
efficiency
Under current rules, when you die, the income dies with you unless you have chosen a joint life
annuity, in which case the income can continue to be paid to your surviving spouse or civil partner.
Alternatively, you could choose to have a guarantee period. This ensures the income is paid for a
minimum period, usually five to 10 years, even if you die during this initial term.
As a rule of thumb, the more flexibility you add to an annuity, the less income it pays at the start.
Like all the retirement options outlined here, you pay income tax on your annuity payments at your
highest marginal rate.
Can be
passed on
Guaranteed
income
(annuity)
Unlimited
withdrawals
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Whole
pension
as cash
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what are the new pension rules?
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b. Unlimited withdrawals
Security
Risk
c. Cash
Flexibility
Tax efficiency
Can be passed on
Unlimited withdrawals will be available mainly through a new type of plan called Flexi-Access
Drawdown – your pension fund remains invested and your income payments will come out directly
from that.
You can take as little or as much as you like and your payments can be regular (typically monthly) or
ad-hoc. If you don’t want to take an income there’s no requirement to do so.
Unlike an annuity, though, your income is not guaranteed. So there’s a risk that you might run out of
money before you want to, especially if your investments do not perform as well as you hope and/or
you take too much money out (either as a higher income or by withdrawing additional lump sums).
On the plus side, you remain very much in control. Unlike an annuity, if your circumstances change,
you can change your plans to suit.
As with all retirement income, you will be liable to income tax at your highest marginal rate. However,
because you can control when you take income payments you also have more control over the tax
you pay. For instance, if in one year you have income from other sources that takes you near to the
higher-rate tax threshold, you could decide to avoid taking income from your pension to keep yourself
in the basic rate tax band.
Security
Risk
Flexibility
Tax efficiency
Can be passed on
Taking the whole of your pension as cash is the ultimate in flexibility, but also the riskiest option.
You’re free to take the money out of your pension and do what you wish with it. However, when you
do so, you are left with two challenges.
Firstly, the large tax bill you could receive – have look at John’s example on page 18 to see how this
could work.
Secondly, unless you have other sources of income you will still need to provide for your retirement.
In addition, if you want to pass on any money after your death, you may find keeping it in your
pension is more tax-efficient. For instance, if you invest the money you take out of your pension, on
your death those investments will normally be included as a part of your estate and may therefore be
subject to inheritance tax of 40%. If you leave the money in your pension instead, it could be taxed as
income or even paid-out tax free (see page 19).
If you die whilst you still have money in your pension pot, you could pass it on tax-efficiently or, in
some cases, even tax free (see page 19).
A new tax-efficient way to take flexible lump sums from your pension
If managing tax is a priority, you could consider a new way of drawing from your pension (the
technical name is Uncrystallised Funds Pension Lump Sum or UFPLS).
This allows you to take lump sums from your pension without going into drawdown. Rather than
a tax-free lump sum upfront, every time you take money out, a portion of it will be paid to you tax
free, with the rest added to your taxable income for that tax year.
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How do these flexible options work in practice?
Here’s an example:
This example simply aims to illustrate the main retirement options. It is based on several assumptions
and generic circumstances, which will be different from yours:
Name: John
Date of birth: 5 April 1950 (age 65)
State pension: £5,881.20 a year
Private pension fund: £200,000 in total
Retirement date: 6 April 2015
State pension: maximum state pension of £113.10 a week
John plans to take his maximum tax-free cash at
the start – £50,000
Tax calculations: assume the only taxable income is pension income (state plus private pension).
income tax rates and allowances are those applicable in the 2014/15 tax year
After taking this, therefore, John is left with £150,000 in his pension. He now
needs to decide what to do with it. Here is a simple overview of some of the
options available to him.
If he chooses…
John could take…
but he would have to pay
income tax …
Guaranteed income
£8,215 a year for life
£819 this tax year and any
subsequent years
Unlimited
withdrawals
As much income as he likes – but the
more he takes, the higher the risk he
could run out of money too soon. For
example he could take:
The more he takes, the more
tax he will have to pay. For
instance:
•£3,976 tax on £24,000
income this tax year and any
subsequent years
•£1,176 tax on £10,000
income this tax year and any
subsequent years
•If we assume he is taking
3.5% investment income he
would pay no further tax as
this would be covered by his
personal allowance
•£24,000 a year, but this could run out
by the time he reaches age 73
•£10,000 a year, this could last until he
reaches age 89
•Or, at the other extreme, he could
just take the income his investments
produce, without touching the capital.
That should mean on death he should
still have a significant pension left to
pass on to his heirs
Guaranteed income
PLUS
Unlimited
withdrawals
£4,107 a year for life – by using half of his
net pension (£75,000) to buy an annuity
Tax would depend on the total
income he takes
Ad-hoc lump sums
£60,000 this year, leaving £90,000
invested in the pension and available
for future withdrawals
£15,979 this tax year
All the cash at once
£150,000, leaving nothing in the
pension
£56,273 this tax year
PLUS
As much income as he likes from
the remaining balance of his pension
(£75,000). This would work in the same
way as the flexible income explained
above
Guaranteed income: single life annuity for a 65 year old male living in Peterborough, no
enhancements, based on best buy annuity rates as at 29/01/2015
(www.ft.com/personal-finance/annuity-table).
Flexible income: assumes investment growth of 5% a year and charges of 1% a year
Income received and the amount of tax to be paid are only two of the various factors you should
consider before deciding how to make withdrawals from your pension. If you’re unsure which is the
right approach for you, please seek advice.
change 2: pass on your pension tax-efficiently, or even
tax free.
The second most sweeping change the government has introduced gives pension investors more
flexibility when they pass on their pension fund after death.
Based on old rules, if you died after taking money from your pension, or after age 75, the taxman
would take more than half of your pension pot. This 55% tax charge has now been abolished. In its
place are far simpler and fairer tax rules.
The table on page 20 explains what happens to any money you have left in your pension, depending
on your age when you die and how your beneficiaries decide to take the money.
Please note, transitional tax rates apply to lump sums paid before 6 April 2016 if you die after age 75.
That said, it is normally possible for your beneficiaries to defer payments for two years. So, for example,
someone inheriting a pension today could delay a lump sum payment until 6 April 2016 and benefit from a
potentially lower tax charge or opt for flexi-drawdown and take all the income in one go (taxed as income).
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change 4: new retirement age.
What happens to money left in your pension?
…and your beneficiaries take the
pensions as a lump sum
…and your beneficiaries take
the pensions as income
If you die
before age
75…
Tax free (if paid within two years)
Tax free - your beneficiaries pay
no tax when they take the money
via an annuity or drawdown
If you die
after age
75…
55% tax for payments made before
6 April 2015
45% tax for payments made between
6 April 2015 and 6 April 2016
Taxed as income for payments made from
6 April 2016
Taxed as income
So what could you do?
You can retire when you want to – but that’s not the same as being able to draw on your pension.
Some people choose to wind-down towards retirement, taking some income from their pension
alongside a reduced income from working fewer hours.
In pension terms, retirement age is the age at which you can start to draw from your personal
pension. At the moment, this is 55, 10 years earlier than the state pension age.
From 2028, state pension age will rise to age 67 and it is proposed that the age at which you can
draw on your private pension will follow suit, continuing to shadow the state pension age by 10 years,
i.e. rising to age 57. So this will affect anyone born after 1971.
On the HMRC website you can find a useful guide that estimates your state pension age.
change 5: new rules for defined benefit pension transfers.
From April 2015, if you want to transfer-out of a final salary pension (also known as a defined benefit
pension), maybe to take advantage of the new rules, you must first take independent financial advice.
If you have a private pension, it makes sense to ensure your wishes are up to date. You can normally
nominate beneficiaries via a simple expression of wish or nomination form when you start the pension, or
at any point after that, simply by contacting your pension provider.
The transfer to a private pension could mean you can take the money out more flexibly, but it also
means you will lose some very valuable benefits. So it will be important to weigh-up the pros and
cons. Taking advice will help you do that and ensure you fully understand the implications.
change 3: guidance guarantee from the government.
change 6: new contribution limits once you are taking
a pension.
Under the new rules your options at retirement are going to be much wider. However, greater choice
requires a proper understanding of how each retirement option works and how they could fit together.
To ensure everyone has access to accurate and unbiased information, the government is introducing
a new service.
The service, called PensionWise, will offer free and impartial guidance about your retirement options;
online, over the phone and face to face. It will be provided by the Citizens Advice Bureau and the
Pensions Advisory Service. You can register and check for updates on the PensionWise service at
www.pensionwise.gov.uk.
The current pension rules allow most people to contribute up to what they earn each year into a
pension and receive tax relief. An overall £40,000 p.a. cap also applies to all contributions to all
schemes. The same limits will apply after the changes.
However, once you start making withdrawals over and above the tax-free cash figure, either via FlexiAccess Drawdown or an Uncrystallised Pension Lump Sum (UFPLS), if you want to make further
money purchase contributions into a pension there will be a new annual limit of £10,000.
This is known as the ‘money purchase annual allowance’ and is designed to restrict people from
abusing the generous pension tax relief system. The rules are quite complicated so if you think this
affects you, you should research the subject thoroughly or seek advice.
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how will the new pension
options affect me – and what
could I do about it?
When the new rules were first announced, the government said they would affect 18 million people,
namely everyone with a pension. However, how you could benefit will depend on what type of
pension you hold and how far you are from retirement.
Here we highlight the actions different groups of people may want to consider.
I have a private pension and I’m planning to retire
this year, what could I do?
You are part of the first generation of retirees who can enjoy the new flexible pension options.
From 6 April 2015 you’ll have more choice over how to draw money from your pension.
The most valuable thing you could do in the meantime is to collect as much information as possible,
so when the time comes you are ready to make a decision.
You will want to understand the various options, decide what value you place on flexibility and
security and consider your overall financial situation.
Based on that recent research from NEST, it looks as if many people – almost one in five retirees –
will opt for a combined solution:
• a guaranteed income from an annuity or any final salary pensions to cover their basic needs, and,
• a flexible income or lump sums drawn from their personal pension to cover more discretionary
expenses.
so how could you prepare to make that decision?
Here are some useful pointers:
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• Approaching your retirement date you should receive a letter from your pension provider, (you
may have received one already), offering you an annuity quote.
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• It’s generally wise not to automatically accept that. Firstly, you may want to consider alternatives
to annuities. Secondly, even if you choose to buy an annuity, you could almost certainly get a
better income than your provider offers simply by shopping around, just as most people do with
their utility contract or car insurance.
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• Don’t forget: under current rules, an annuity cannot be changed. Once set up you will be lockedin for life, so why accept anything other than the best rate.
I have a final salary pension – what can I do?
• Do a rough budget to see how much income you might need. It may be useful to make a
distinction between essentials and ‘nice to haves’.
The new pension options do not apply to defined benefit or final salary pensions. To benefit from
those options – to take out your pension as cash, for example – you would have to transfer out of
your final salary scheme and into a personal pension. However, this is not a decision to take lightly,
as you would be leaving behind significant benefits and guarantees.
• Work out how long your money could last if you took out as much as you need. Play with the
figures to see the effects of your withdrawals on your fund until you settle at a comfortable level of
income and risk.
• Shop around for an annuity, to see what’s on offer. This could add £000s to your income over
the rest of your life, especially if your health or lifestyle is less than perfect (even something as
common as being overweight or a smoker could result in a better income).
• Use the government’s free guidance service, PensionWise.
• Research more information online, speak to a specialist and if you’re unsure, seek personal
financial advice.
The government is giving retirees a fantastic opportunity to enjoy retirement on their own terms, but
you’ll need to make it happen for yourself.
I’m already retired, what could I do?
The answer will depend on whether you have bought an annuity or are in ‘capped income drawdown’.
If you have bought an annuity, there is nothing you can do currently. However, in his Budget
2015 speech, Chancellor George Osborne announced that, subject to consultation, from April
2016 investors who’ve already bought an annuity should be able to swap it for a lump sum, or an
unsecured income through drawdown. The payments will be taxed as income. There are currently
no further details, so if you think you might be affected keep an eye on the press or the PensionWise
and HMRC’s websites.
If you are in capped income drawdown, you can already take an income from your pension pot, whilst
leaving it invested. However, currently the income you can take is subject to a limit (known as the
GAD limit).
After April 2015, by moving to Flexi-Access Drawdown you will be able to take more than the current
limit allows. This should be available either through your current drawdown provider or by transferring
to another. But do remember to look at the impact taking a higher income will have.
With a final salary pension, your employer effectively promises to replace your salary with a set
retirement income. This is usually very generous, compared to what you could receive through an
annuity. It is also much more secure than any flexible income you might draw from a private pension.
Because of this, from April 2015, if you wish to transfer-out, the government requires you to take
independent personal financial advice. This is in order to ensure you fully understand the impact of
your decision.
However, this option will not apply to most public sector pension schemes and in most cases it will
not be possible to transfer-out this type of pension scheme after 6 April 2015.
retirement is still far away, what could I do now?
If retirement is still some years away, you have the time to prepare, so you’re in the best place to
benefit most from the new pension rules.
What actions might you consider?
• Maximise your pension contributions: under the new rules you do not lose control of your
pension and you can pass it on tax-efficiently. Moreover, when you contribute to a pension, the
government helps you with up to 45% tax relief. So, a £10,000 contribution into your pension
could actually cost you just £5,500.
• Review your investment choices: if your pension is to remain invested throughout your
retirement, you may be able to take a different approach to choosing where to invest. As a
general rule of thumb, the longer it is before you will want the money, the higher the risk you
can take. But you should always ensure you are comfortable with the overall level of risk you
are taking. You may want more investment flexibility, but find the choice available though your
pension provider restrictive. If that is the case, you could consider transferring to another
provider.
• Review the charges you pay: charges eat away at your money year after year. If you decide to
keep your pension invested through retirement, you may stay invested for 50 or even 60 years. As
your pension fund grows, you’ll want to make sure your pension provider’s small nibbles haven’t
turned into big bites. Over time those provider charges could add up to a really significant sum.
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the Interactive Investor SIPP –
a pension that helps you make
the most of the new rules.
Which pension puts you in the best position to take advantage of the new pension rules? The same
rules apply to all private pensions. Does this mean it makes no difference which you choose? Not quite.
There are three key things to consider.
1 full retirement flexibility.
You may want to consider a pension that gives you access to all the flexibility the government has
introduced – some providers may not offer full flexibility.
Come retirement, you could:
• choose to buy an annuity,
• take all the money out, or
• take a regular income, ad-hoc lump sums, or both.
Better still, you could mix and match more than one option to create your ideal plan. The Interactive
Investor SIPP (Self Invested Personal Pension) allows you to do this.
2 investment flexibility.
If you are interested in the new flexibility, or simply want to keep your options open, you will want a
pension that gives you flexible investment choices.
Some pensions only allow you to choose investments from a handful of funds, often run by those
insurance or pension management companies themselves.
Our SIPP, on the other hand, allows you to invest pretty much where you like. You can choose
from thousands of funds – including all the major fund groups, UK and international shares, ETFs,
investment trusts, bonds, gilts and cash.
You may not want to invest in all these different types of investment, but you have the option to do so.
In this way, a SIPP is very similar to any other investment account you hold, such as a shares ISA or
a share dealing account.
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If you’re unsure about where to invest your pension, you’ll find plenty of inspiration on our website,
www.iii.co.uk. There’s news and analysis about funds and shares, selector and filter tools to help
narrow the field, and helpful comments from our investment experts.
If you need any extra help to get started, or do not have the time to choose your own investments,
you can consider our ready-made portfolios and hand-picked selection of funds across different
investing themes, such as growth or income funds or those focusing on emerging markets.
Our SIPP gives you as much investment flexibility as you’d like, and with fair, simple charges too.
As with all investments, though, returns are not guaranteed. Your SIPP investments, and any income
they provide, could go down as well as up in value so you could end up with less than you invest.
3 fairer account charges.
The third and final point you will want to consider is charges. After all, the more you pay in charges,
the less is left in your pension – so the less you may have in retirement.
Some charges are unavoidable. For instance, annual charges applied by the fund manager if you’re
investing in funds, or fees for taking an income or reviewing your plan. However, you do have a
choice when it comes to account charges – what you pay to your pension provider (this can also be
called a platform or administration fee), and dealing charges.
Most pension and SIPP providers take a percentage of your pension value as a fee. This could
be only a few pounds a year when you start building your pension, but add up to a very significant
amount over time as your pension pot grows.
For instance, if you have a pension worth £100,000, based on an account charge of 0.45% a year
you could easily pay £450 a year just in account charges. If your fund grows, so will the amount you
pay. If it grew by 5% a year, over 10 years you would pay nearly £6,500 in charges. Over 30 years,
nearly £40,000. Over 50 years, that figure would add up to over £86,000.
We think that’s not fair. We firmly believe that you should be the one who benefits from the growth
you achieve – after all, keeping it in your pension will help you grow it even further.
That’s why we charge a low, fixed, fee of £80 + VAT p.a. to administer your SIPP and just £80 a year to
cover the day-to-day running costs – and that includes £80 worth of trades too. Of course, when you need
to take specific actions such as arranging income drawdown, reviewing those arrangements or purchasing
an annuity, there may be further costs associated. But you’ll find these set out, fair and square, in our
Charges information.
In addition, when you choose the Interactive Investor SIPP, you also benefit from online access, great
no-nonsense service, and handy investment tools to help you find the right investments.
Read more about our great value, flexible SIPP now. Simply go to www.iii.co.uk/sipp.
what next?
Making the most of these new pension options could mean a big difference to your retirement.
Planning today will help you make the most of tomorrow. So take a look at your current pension
arrangements, make sure you know how those schemes work, what they are currently worth and how
they might grow.
If you’re not currently contributing to a pension, now is the time to start. Putting something aside every
month – especially if your employer contributes too – is a good discipline and something you’ll thank
yourself for later in life. Your current self may thank you too, for the government’s contribution only
comes when you pay in … and as we’ve seen that extra boost adds up to a valuable sum over time.
Interactive Investor has a lot more to offer than just pensions. From day-to-day trading accounts to ISAs
and SIPPS, we provide a safe, convenient place for investors to hold, monitor and manage their assets.
We support an active community of like-minded people in achieving their financial goals – throughout
their financial life – and help them create a firm foundation for their children’s future finances.
We look forward to helping you achieve your financial goals.
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annuity
An annuity is a secure, regular income you can buy from an insurance company using your pension fund.
The insurance company is then responsible for paying you that income for at least the rest of your life.
The level of income you receive will depend on the annuity rate. This in turn depends on many
factors, including the provider you choose, your age, where you live, your health and lifestyle and
how much flexibility you want.
For example, you could have the income paid to your spouse or civil partner after you die (known
as joint life annuity); receive an income that increases each year (known as inflation-linked annuity);
guarantee to have your income paid for at least a set number of years (known as guarantee period).
All these options make your annuity more flexible but are likely to result in a lower starting income.
Health conditions and lifestyle factors, of which there are over 1,500, could result in a higher income.
You might see then referred to as, for example; enhanced annuity, impaired life annuity, ill health
annuity or smoker annuity. Under current rules, once set up an annuity cannot be changed. However,
in his Budget 2015 speech, Chancellor George Osborne announced that, subject to consultation,
from April 2016 investors who’ve already bought an annuity should be able to swap it for a lump
sum, or an unsecured income through drawdown. The payments will be taxed as income. There are
currently no further details, so if you think you might be affected please keep an eye on the HMRC
and PensionWise websites.
capped income drawdown
Capped income drawdown (also known as drawdown or income drawdown) is a method of taking an
income from private pensions as an alternative, or in addition to, an annuity under the pension rules that
apply until 5 April 2015.
Unlike an annuity where you effectively give your pension fund to an insurance company in exchange for
a secure income, with drawdown you keep control of your pension which remains invested.
However, this means you have extra responsibility and risk. You might run out of money before you want
to, especially if your investments do not perform as well as you hope and/or you take out too much money.
The income you can take each year is currently subject to government limits (known as Government
Actuary Department, or GAD limits – see page 34 for more information).
However, from 6 April 2015, it will be possible to override these limits – see Flexi-Access Drawdown on
page 34.
Those already in capped income drawdown can decide whether to still take an income within their GAD
limit or move to Flexi-Access Drawdown.
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death benefits
enhanced (or impaired) annuity
Death benefit rules determine what happens to your pension when you die. From 6 April 2015 these
rules will be much simpler and more advantageous than in the past, making passing on a pension
fund very tax-efficient and flexible.
These are a type of annuity that allow people with health or lifestyle conditions to receive a higher income.
Depending on the options offered by your pension scheme your beneficiaries can decide whether to
take the pension fund as a lump sum or as income. Depending on your age when you die, they may
have to pay income tax.
defined benefits pension
A defined benefits pension promises to pay you a regular income. The amount will normally be based
on your earnings at retirement or over a particular period of employment.
Unlike defined contribution pensions, that retirement income is guaranteed.
This type of pension is normally available only through your employer. It is still common in the public
sector, but there aren’t many private sector companies that still offer them to new members.
defined contribution pension
A defined contribution pension, also known as a money purchase pension or in some cases a private
pension, is effectively a pot of cash.
Defined contribution pensions can be available through work (so you can benefit from contributions
from your employer) or you could start one yourself, either through a financial adviser or directly with
a provider, such as an insurance or investment company.
You, and hopefully, your employer add money (plus tax relief from the government) and that money
is invested. The more that is contributed, the better the investment performance, and the lower the
charges, the larger your pension pot and, therefore, the larger the retirement income you might
receive. You decide how to take income – see taking benefits on page 39.
Common types of defined contribution pensions include Personal Pensions, Retirement Annuity
Contracts, Group Personal Pensions, Stakeholder and Group Stakeholder Pensions, Money
Purchase Occupational Pension Schemes and Self Invested Personal Pensions (SIPP).
drawdown (or Income drawdown)
See ‘Capped Income Drawdown’
There are over 1,500 conditions that qualify for an enhancement and it is estimated 70% of retirees
qualify. The most common ones are:
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smoking
diabetes
high blood pressure
heart disease
cancer
kidney failure
The amount of extra income will typically depend on the seriousness of the condition.
expression of wish form
This is also known as a nomination form. It is normally available from your pension provider and
allows you to indicate to whom your pension pot should be paid after your death. It is not legally
binding, but will give your pension scheme managers an idea of your wishes.
You can have more than one beneficiary and they don’t need to be related to you although some
schemes can only pay benefits to certain categories of people. It is normally possible to change the
beneficiaries if needed.
final salary pension
This is one of the most common types of defined benefits pension, where the retirement income paid
is based on your length of service and salary in the final year of employment.
fixed-term annuity
It is a type of annuity that provides a guaranteed income for a set number of years (term) – usually five
or 10 – plus a maturity amount at the end of the term. You can then decide what to do with the latter.
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flexi-access drawdown
money purchase annual allowance
This is a new product, introduced by the new pension rules and available from 6 April 2015. It is
similar to the current capped income drawdown and will effectively replace it. Like capped drawdown,
your pension fund remains invested and you draw an income directly from it.
This sets a limit on how much you can contribute to money purchase pensions and receive tax relief
after you make any withdrawals over and above the 25% tax-free cash.
Equally, as with capped income drawdown, the income is not guaranteed, so if your investments perform
badly or you draw too much, you could run out of money before you want to. There is one important
difference though: with Flexi-Access Drawdown there are no limits as to how much you can draw, either
as a regular income or lump sums. You could even take the whole of your pension in one go.
GAD limits
These are limits decided by the Government Actuary Department that determine the maximum
income you can currently take from your pension pot through capped income drawdown.
These limits will be removed from 6 April 2015 for most people.
income tax
Income tax is a tax you pay on certain types of income, such as your salary, retirement income, and
rental income, to name a few.
Income tax is made up of different bands, so as your income increases, so too does the amount of
income tax you pay. There are four rates: 0%, 20%, 40% and 45%. See ‘How much tax could I pay?’
on page 13.
For most people, the first portion of their income is tax free. This is known as personal allowance. The
amount is decided by the government each year. For most people it is £10,000 in the 2014/15 tax
year, increasing to £10,600 in the 2015/16 tax year.
lifetime allowance
The lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump
sums or retirement income, paid out to you or to your beneficiaries when you pass your pension on.
It is currently £1.25 million for most people. If your pension pay outs exceed that limit, your fund will
be subject to an extra tax charge. The lifetime allowance applies to the total values of all private and
occupational pensions, but it does not include the state pensions. If you think your pensions could
exceed the reduced lifetime allowance of £1 million, you should be able to apply for ‘transitional
protection’, to protect your fund from the tax charge. Details will be available on the HMRC website.
It is currently set at £10,000. It only applies to defined contribution pensions, not to benefits you build
in a defined benefits scheme – although you will need to take into account your money purchase
contributions when considering how much you can pay into these schemes.
You will be affected by the money purchase annual allowance if:
• you’re currently in flexible drawdown (this will become Flexi-Access Drawdown from 6 April 2015)
• you draw down more than 25% tax-free lump sum from a defined contribution pension (but only if
your pension is worth more than £10,000 in total)
• you are already in capped drawdown and after 5 April 2015 withdraw more than the maximum
capped drawdown amount
money purchase occupational pension
A defined contribution pension available through your employer.
money purchase pension
See ‘Defined contribution pension’
nomination form
See ‘Expression of wishes form’
pension commencement lump sum
See ‘Tax-free cash’
PensionWise
This is a new, free and impartial service introduced by the government to help you understand your
choices and how they work.
The service will be available through the PensionWise website, over the phone or face to face. It will cover:
• what you can do with your pension pot
• the different pension types and how they work
• what’s tax-free and what’s not
The service will be provided by The Pensions Advisory Service and The Money Advice Service. For
details, see www.pensionwise.gov.
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personal allowance
retirement income
This is the amount of money you’re allowed to earn each tax year before you pay income tax. Most
people’s Personal Allowance in the 2014/15 tax year is £10,000, unless you were born before
6 April 1948 or your income is over £100,000.
This is the income you draw from your private pensions. It can be provided by buying an annuity or by
drawing directly from the pension (typically through drawdown).
If you or your spouse or civil partner were born before 6 April 1935, you could also claim Married
Couple’s Allowance and if you’re blind, Blind Person’s Allowance.
For details see www.gov.uk/income-tax-rates.
personal pension and group personal pension
This is a type of defined contribution pension. It is a pot of cash you and sometimes the government
pays into, to build a retirement nest egg. If you were offered a personal pension in your workplace, it will
be called a group personal pension and you will also benefit from contributions from your employer.
Personal pensions are normally provided by insurance companies. You can decide where the
pension should be invested. Investment choice varies depending on the provider and ranges from a
handful of funds to a few thousands.
private pension
See ‘Defined contribution pension’
retirement age
This is the age from which you can start drawing from your private pensions (whether or not you’re
still working). Currently, this is 55 although from 2028 it will go up to 57 and thereafter it will go up in
line with state pension age (67 at that point) but staying 10 years ahead of it.
Retirement Annuities Contracts (RACs)
They are a type of defined contribution pension and were originally created for the self-employed, or
workers not offered a workplace pension before July 1988.
It hasn’t been possible to take out a new retirement annuity contract since 1 July 1988, but contracts
taken out before this can remain in place.
They sometimes offer valuable benefits, such as guaranteed annuity rates (which tend to be much
higher than those currently available).
Self Invested Personal Pensions (SIPPs)
A SIPP is a type of personal pension that gives very wide investment choice.
Whilst a personal pension may only allow you to invest in funds (unit trusts), a SIPP allows you to
invest pretty much where you like, from stocks and shares to commercial property and, in some
cases, more exoteric investments such as vintage cars and fine wines.
There are two kinds of SIPP:
• Full SIPPs, normally set up through a personal financial adviser, allow complete investment
flexibility, but can also be quite expensive.
• Low-cost SIPPs (or execution only SIPPs) are normally set up directly with a provider, such as an
investment company, fund supermarket or online stockbroker such as Interactive Investor. They
usually have lower costs than full SIPPs and usually allow you to invest in stock market-based
assets including; funds, shares, investment trusts, ETFs, gilts, bonds and cash.
stakeholder pension and group stakeholder pension
A stakeholder pension is a type of defined contribution pension. It is a pot of cash you and sometimes
the government pays into, to build a retirement nest egg. If you were offered a stakeholder pension
in your workplace, it will be called a group stakeholder pension and you will also benefit from
contributions from your employer.
Stakeholders are a simplified version of personal pensions (they normally offer more limited investment
choice) and their costs are capped at 1.50% a year for the first 10 years and 1% per year thereafter.
It’s worth noting that, when stakeholder pensions were introduced in 1999, personal pensions tended
to be quite expensive, so the stakeholder charge cap was valuable. Nowadays, there are many
private pensions, including SIPPs, with lower charges and much wider investment choice.
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state pension
taking benefits
State pension is the government’s contribution towards your retirement, in return for the National
Insurance contributions you have paid or have been credited during your working life.
This refers to taking money from your pension pot – the 25% tax-free cash and/or any other withdrawals.
The state pension is changing. You’ll fall under current or new rules depending on your age and gender.
Current state pension:
• men born before 6 April 1951
• women born before 6 April 1953
How much is the current state pension?
The most you can currently get in basic state
pension is £113.10 per week (this will increase
by at least 2.5% a year).
Some people may also be eligible for
Additional State Pension, based on their
National Insurance contributions.
The amount of Additional State Pension is not
fixed. It depends on your earnings and whether
you’ve claimed certain benefits.
New state pension:
• men born on or after 6 April 1951
• women born on or after 6 April 1953
How much will the new state pension be?
The full new state pension will be at least
£148.40 per week. The actual amount will
be set in autumn 2015 and will increase with
inflation.
You could get more or less than that, based on
your National Insurance record.
From April 2015, when the new pension rules take effect, you will have complete flexibility over how you
make withdrawals from your private pensions although some schemes may not offer all the options.
It is currently possible to take benefits from age 55 (retirement age). This will increase to age 57 in 2028
and, thereafter, stay at 10 years before the state pension age.
tax-free cash
Currently, from age 55, most people can normally take up to 25% of their pension pot as a tax-free lump
sum. This is also known as a pension commencement lump sum.
Some people may be entitled to receive a larger portion of their pension pot tax free – this will be
specified in your policy documents.
Uncrystallised Funds Pension Lump Sum (UFPLS)
This is a new option from April 2015.
It is an alternative to drawing up to 25% tax-free cash from your pension at once, then making taxable
withdrawals from the rest.
With UFPLS you would not take an initial tax-free lump sum, but make withdrawals instead - as many
and as frequently as you like. 25% of each withdrawal would be tax free, 75% taxable.
state pension age
State pension age is the earliest you can start claiming your state pension (you can do so even if you’re
still working).
The current state pension age is 65 for men born before 6 December 1953 and between 60 and 65 for
women born after 5 April 1950 and before 6 December 1953.
By October 2020 it is planned to be 66 for both men and women. Under current legislation, state
pension age will increase to 67 between 2034 and 2036 and to 68 between 2044 and 2046.
If you’re unsure what your state pension age is, you may find the state pension calculator at
www.gov.uk helpful.
This could be more tax-efficient. If your pension grows in value over time (this is not guaranteed of
course), the cumulative amount you receive free of tax could be greater than the amount you would
receive if you took all your tax-free cash at the start.
In addition, when choosing this option, you do not need to set up a drawdown plan.
Please note: these definitions are based on our current understanding of the applicable tax rules, pension arrangements and
forthcoming changes. They may be subject to change in the future.
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take care
of tomorrow.
iii.co.uk/sipp
Interactive Investor Trading Limited, trading as “Interactive Investor”, is authorised and regulated by the Financial Conduct Authority. Registered
Office: Standon House, 21 Mansell Street, London E1 8AA, Tel: 0845 200 3637. Registered in England with Company Registration number 3699618.