Pre-Retirement Pension Planning
When undertaking retirement planning on behalf of Pharmacists, Warr & Co Independent Financial Advisers (IFAs) often advise them to consider a holistic approach as it is considered that various investments and allowances should be utilised in order to provide both a flexible and tax efficient income stream in retirement. The list of options available is clearly extensive, including personal or corporate savings & investments and, of course, pensions. When evaluating pre-retirement funding through a pension, a primary consideration is that of what type of investment wrapper should be utilised. This decision has been very much influenced by the legislative changes that became effective on 6th April 2006, commonly known as ‘A Day’.
Various pension regimes encompassing personal pensions, occupational pension schemes and additional voluntary contributions merged into one. There are now, therefore, no differences in respect of allowable contributions, the effect of the lifetime allowance and tax-free cash entitlements on benefits accruing from 6th April 2006, regardless of the pension wrapper chosen.
There are still differences, however, in respect of how the schemes are administered with personal pensions still offering, in many cases, a simpler version than the more complex occupational pension scheme, which can be more of an administrative burden.
Investment in a pension plan offers tax advantages in that tax relief is available on contributions and growth is largely tax-free. However, the downside is that the income derived from the accumulated fund, less of course the permissible 25% tax-free lump sum, is taxable. An upside or downside, depending on your viewpoint, is that access to the funds is not available until you have attained the minimum retirement age.
There are generally three categories of personal pensions as far as investment is concerned: Stakeholder Personal Pensions, Non-stakeholder Personal Pensions and Self-Invested Personal Pensions (SIPPs).
Stakeholder
With Stakeholder pensions, there is a maximum annual charge of usually 1% per annum, although new plans may charge up to 1.5% for the first ten years and a limited range of pension funds from which to choose, generally restricted to those offered by the pension provider.
Personal Pension Plans (PPPs)
A ‘middle ground’ that has become popular is that of the ‘wrapper’ or ‘platform’ concept. These plans offer access to a wide range of funds, both in house managed funds and those offered by a multitude of other external investment houses. These may not offer the level of investment diversification that SIPPs can, however, they generally strike a happy medium between availability of funds for an acceptable premium over the charges of a Stakeholder product.
Self-Invested Personal Pensions (SIPPs)
At the other end of the spectrum are Self-Invested Personal Pensions (SIPPs). In contrast these generally allow access to literally thousands of funds / investment options offered by any number of fund management groups. You may also invest directly in shares and other direct assets, including for example bank accounts, gilts, corporate bonds, etc. Investment decisions may be made by the pension holder themselves, or by reference to advice from a financial adviser or stockbroker. SIPP fees do tend to be much higher than for Stakeholder policies with charges often relative to the level of investment choice.
SIPPs are also appropriate where commercial property investment is being considered. Following the legislative changes of 'A Day' the opportunity to invest into commercial property has become much more limited. This was as a result of the change in the borrowing rules. Consequently, property has now become a very niche investment option available only to those that have accrued substantial funds. Whilst technically permissible, investment into residential property is now regarded as a ‘prohibitive’ investment, such are the penal tax charges that apply.
Self-investment into commercial property may be of particular interest to Pharmacists looking to purchase premises for their new or existing business.
Occupational Pension Schemes
Occupation pension schemes such as Executive Pensions (EPPs) and Small Self Administered Schemes (SSAS) are additional options, however, given the additional administrative burden associated with these, they may be suitable for only a small minority.
Pension Reviews
As well as advising clients regarding new pension planning, a great deal of work undertaken is the review of existing arrangements. There are many reasons to review plans, including funding levels, charges, investment choice, flexibility, performance, death benefits and retirement options. Given the complex structure of some existing policies, clients should proceed with caution when reviewing their plans and we strongly recommend that they do so with the benefit of independent financial advice from an IFA such as Warr & Co Independent Financial Advisers. To decide to transfer or switch your pension without professional advice could lead to the loss of important features and benefits such as higher than 25% tax free cash lump sum entitlements, Guaranteed Annuity Rates (GARs) and / or the unforeseen triggering of penalties, be they plan related or fund related, as with Market Value Adjusters (MVAs) that can apply to With Profits funds.
Feel free to contact Warr & Co Independent Financial Advisers to discuss your pension planning requirements whatever they may be.
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