your pension questions answered
everything you need to know
about pensions and more
what is a pension?
A pension scheme offers a simple way of saving and investing money now to use as an income once you stop working. You can access the money in most pensions from the age of 55. There are also lots of tax advantages compared to other ways of saving for retirement.
There are many different types of pension schemes, from state and workplace through to a personal pension – we explore all options below. When you finally decide to retire, you’ll have a number of options when it comes to accessing your pension pot. You may wish to take a tax-free for a special holiday or event, or you may wish to receive a regular income – the choice is down to you.
At Mercantile Circle we offer a type of personal pension, otherwise known as a SIPP. You can contribute as much as you want into the Mercantile Circle pension, up to £40,000 per year or the value of your annual salary – whichever figure is lower. For basic rate tax payers the government adds 20% of any amount you contribute – those paying a higher rate can claim even more. And even if you’re not earning, you can contribute up to £2,880 a year, providing you are under 75. You cannot withdraw money from your personal until you’re 55.
Designed to deliver much higher returns than other types of pensions, Managed SIPPs do offer a higher level of risk but the potential long-term returns are far greater. Your SIPP will be very much tailored to your individual circumstances and your attitude to risk. Expert portfolio managers will seek value in the market to ensure you obtain the greatest returns possible for your investments.
Many employers offer a workplace pension scheme. There are two types: Defined Contribution and Defined Benefits; however the later, often known as a ‘final salary pension’ is slowly dying out. We explain both options below:
Defined contribution pension schemes
Defined contribution schemes are the most popular type of pension scheme on the market today. If you are enrolled into a workplace pension, typically, you will automatically pay a percentage of your monthly salary into the scheme and your employer will match those contributions, up to a certain amount.
You may however decide to set up a separate personal pension plan. With a defined contribution scheme, the income you receive in retirement depends on how much you’ve built up in your pension pot and the performance of the investments, minus any charges incurred.
Defined benefit pension schemes
A defined benefit pension schemes, otherwise known as a ‘final salary’ pension is very much a dying breed, due to the potential higher returns that defined contribution schemes offer. With a defined benefit scheme you’ll get a specified amount as income when you reach retirement age.
Your pre-determined retirement income will be worked out by calculating your salary plus length of service. You may have to pay contributions into a defined benefit pension scheme, and your employer usually will too. Such schemes vary from company to company so it’s best to speak to your pension administrator to get the full details of your scheme.
The State Pension is a regular income paid by the UK Government to people who have reached retirement age. The state pension age is currently 65 for men and 60 for women, increasing to 66 for both men and women from 2020. It is intended to ensure that everyone has a basic amount of money to support them in their old age.
State Pensions are funded from National Insurance (NI) contributions – to get the full State Pension you need to have 35 years’ worth of NI contributions or credits. The current maximum state pension available is £115.95 per week – what you receive doesn’t depend on how much you have earned, but your own NI record.
Your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you originally invested A Mercantile Circle SIPP may not be right for everyone and tax rules may change in the future. If you are unsure if an SIPP is the right choice for you, please seek independent financial advice.
what are the tax benefits?
A pension really is one of the best options when it comes to saving for your retirement, due to the tax relief you’ll receive on the contributions you make. Tax relief comes in two forms, depending on whether you’re a basic-rate or higher-rate taxpayer. You’ll get the tax back on all contributions you make, subject to an annual allowance and providing you are under 75. This usually goes straight into your pension pot.
For basic rate taxpayers’ the government adds 20% of any amount you contribute, up to a certain limit. This limit is based on your annual salary and capped at £40,000 and you can carry forward unused allowances for up to three years. If you are a higher-rate taxpayer you can claim an additional 20% while top-rate taxpayers can claim and additional 25%.
If you are part of a workplace pension, you may not need to reclaim any tax if your employer simply deducts less tax from your pay. However if you don’t reclaim it won’t be paid – therefore it is important to check which tax bracket you are in. For further information on how to reclaim tax visit HMRC.
One of the benefits of a Mercantile Circle pension is that we’ll use our own funds to automatically add the 20% government top-up as you make your monthly contributions into your pot, unless instructed otherwise. If you are a higher-rate taxpayer you can reclaim the extra relief from HMRC yourself.
There is also a lifetime allowance with pensions. This is the upper limit on pension benefits you’re allowed to receive before you have to pay tax. The lifetime allowance is currently £1m as of 6 April 2016. Any amount above this is subject to a charge of 25% if paid as a pension or 55% if paid as a lump sum. The lifetime allowance was reduced for this tax year from £1.25m to £1m. If you think your pension savings will be affected you may be able to apply for protection.
How does tax relief work?
If you get 20% tax relief, it doesn’t mean you get 20% back of what you contribute. Instead, the taxman works out your earnings on your contribution amount before tax was deducted. You then get back the difference between your contribution and your pre-tax earnings.
So when a basic 20% rate taxpayer invests £80 of their take-home pay in a pension, they’d have actually earned £100 before tax to come out with £80 (20% of £100 is £20, leaving £80). In that example, the tax relief is £20. The graph below illustrates this.
how much can I pay into my pension?
There’s technically no limit as to how much you can put in a pension, however there are limits on how much tax relief you’ll get for doing so, alongside a lifetime limit. Here’s what you need to know:
Applicable to higher earners, £40,000 is the maximum amount that can be contributed into your pensions each tax year. This limit is the combined contributions by you, your employer, any tax relief you receive from the government and any unused allowance from the previous three tax years. Find out more about pension tax relief.
From 6th April 2016, individuals who have income for the tax year of above £150,000 will have their pension annual allowance for that tax year tapered, meaning it will reduce depending on their earnings. The annual allowance does not apply to pension transfers
If you earn less than £40,000, your annual pension limit is the value of your annual salary. You’ll get tax relief on contributions up to your annual earnings whether you have additional savings o or not. For example, if you earned £25,000 each year, but had £35,000 in savings, and decided one day to put all your savings into a pension. In this situation, you would only earn tax relief on the first £25,000 of your contributions.
There is also a lifetime allowance with pensions – again, this is only relevant to the highest earners. This is the upper limit on pension benefits you’re allowed to receive before you have to pay tax. The lifetime allowance is currently £1m as of 6 April 2016. Any amount above this is subject to a charge of 25% if paid as a pension or 55% if paid as a lump sum. The lifetime allowance was reduced for this tax year from £1.25m to £1m. If you think your pension savings will be affected you may be able to apply for protection
when should I start paying into a pension?
It’s often deemed a sensible option to combine a pension plan with other methods of saving, to ensure you have a comfortable nest egg when you retire.
It’s the age old question – when should I start contributing into a pension? And there is only one answer – ‘to start as early as possible’. There is however a rough rule of thumb for what to contribute for a comfortable retirement:
Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire. Make sure you include your employer’s contribution of you have a workplace question.
As an example, someone opening a pension aged 32, requires 16% of their salary for the rest of their working life, to ensure a comfortable retirement.
There really is no time like the present – the sooner you contribute the longer your money has to work and grow. It is also important to increase your contributions as your earning grow, or you’ll risk falling behind. And another good tip – it’s unlikely you’ll be able to contribute much when you first start earning, but if you apply the quarter rule – every time you get a pay rise set aside a quarter for you pension and as your earnings grow so will your retirement pot. You won’t even know what you’ve been missing.
when can I take benefits from my pension?
Once your money is in a pension it can’t be withdrawn whenever you like – it must stay there until you’re at least 55. If ill health forces you to retire or other extenuating circumstance occur, you may be entitled to withdraw the money before 55.
With a Mercantile Circle SIPP, from age 55, you’ll be entitled to take a tax-free lump sum of up to 25% of the value of your pension. Following this you may use the remainder of the fund to purchase an annuity or take a variable income, also known as a drawdown. This will be in the form of Flexi-Access drawdown, which allows you the flexibility in the amount you may take as an income.
Instead of an annuity or drawdown you may decide to take your benefits in the form of one-off lump sum withdrawals. These are called Uncrystallised Funds Pension Lump Sums. One quarter of these payments are tax free, the remainder being taxed as income and subject to normal income tax payments.
You should speak to your financial adviser to assess which benefit options suit you personal circumstances.
Please note: Annuities are not offered by Mercantile Circle – they must be purchased on the open market.
transferring and consolidating existing pensions
why transfer a pension?
Juggling various pensions and keeping on top of their performance may seem like a full-time job in itself. Transferring and consolidating your pensions so that they sit with one provider will not only save you money but time and you’ll know just how your pension pot is performing in an instant. Hassle-free and simple.
With Mercantile Circle transferring and consolidating your current pensions is effortless. You can transfer SIPPs, personal pensions and most workplace pensions to the circle, providing you haven’t stated to take an income from them. Once we’ve discovered your suitability, its simply a case of filling out the details of your current pensions you’d like to transfer and we’ll do the rest.
what are the benefits of switching provider?
you’ll save money
By transferring your existing pensions to one provider and consolidating your savings, you’ll almost certainly be saving yourself a good few pennies. Chances are that you’re paying a whole host of management fees for your other pensions – consolidating to one single provider that charges lower management fees, means more money for your retirement fund. At the circle we keep our fees low, with no hidden charges – so you’ll always know how much you are paying. We won’t charge you a transfer fee either; however many companies do.
greater potential returns
Compared to other means of saving for retirement, the returns generated from Self Invested Personal Pensions have shown to be far greater. Yes there is an element of risk attached to such a pension and you could lose money, but the potential to benefit from the stock market, with long-term returns speak for themselves. Rescuing your current pensions from mediocre performance and various fees, while retaining their tax-free status could really stack up. You should look to invest in a company that offers a diversified portfolio of investments, rather than just access to a single fund or individual market – the risk is greater spread. Check out our diversified portfolio>>
keep everything in one place
Consolidating your pensions in one place will not only save you money, but time, worry and ultimately confusion. We change our jobs often, so the chances are that you have various pension pots. It’s almost impossible to keep on top pf them all and understand if they are performing. You’ll have complete transparency as to how all of your pensions are performing if held within one portfolio. You won’t need to worry about juggling various accounts and contributing into each, we’ll do the hard work. Not only will they retain their tax benefits but we’ll constantly monitor and rebalance your portfolio to ensure it’s on track.
expert management and regular rebalancing
Many people think they have to be an investment expert to open a SIPP. You don’t. You just need a provider that will take the time to understand your investment goals, your attitude to risk and build a portfolio in line with this. At Mercantile Circle our expert team work hard to build tailored portfolios for each of our clients. Once you’re up and running we’ll keep on top of market fluctuations, whilst monitoring and rebalancing your portfolio to keep it on track, so that you don’t have to.
how to transfer an existing pension to the circle
1. sign-up for our free financial review
We’ll introduce you to our panel of Independent Financial Advisers (IFA), who will start the process of carrying out an independent financial assesssmnet. The aim of the review is to fully understand your current financial position and your vision for the future. This will help inform Mercantile Circle of your suitability, and how we can work with you to achieve your goals.
2. fill out our financial planning questionnaire and risk assessment
As part of the independent financial review, you will be asked to complete a financial planning questionnaire and a risk assessment. This involves asking you a series of questions based on your current investments. Our IFA will also gather together details of all of your current investments, including your pensions.
3. once we identify your suitability, you’ll just need to fill out our SIPP transfer forms and sign our SIPP letter of authority, then leave the rest to us
Once we identify your suitability, we’ll send you a pack including pension transfer forms and letters of authority. These will enable us to work with your current provider to transfer your current pension/s to us — safely and securely.
what about annuities?
At any point from the age of 55 you may purchase an annuity on the open market with the funds you have invested in your SIPP, and with the remaining funds if you take a tax free lump sum.
You do not need to purchase an annuity but you should discuss the options with your Financial Adviser to determine the benefits for you compared to taking income withdrawals.
Annuity rates may rise or fall and this will determine the level of income you may receive. They may provide a fixed level of income or it may be variable.
Mercantile Circle does not offer an annuity, so you may purchase this from any provider on the open market. Your Financial Adviser will be able to advise you on the benefits and risk of annuities and whether this option is suitable for you.
what happens to my pension when I die?
Under pension regulations, every pension scheme provider will determine how funds within your pension will be distributed in the event of your death.
If you die before you start withdrawing from your pension, it will usually be paid as a tax-free lump sum, to the beneficiaries you have selected. This is providing you’re under the age of 75 when you die and that our pension is under the lifetime allowance limit. In the instance you have already started taking a flexible drawdown, the amount your beneficiaries gets depends on your age at death.
If you purchased an annuity, the amount your beneficiaries get very much depends on the terms you signed – this varies from provider to provider, so best to check this out early on.
It is important to note that death benefit payments may be liable to a tax charge, depending on the type of benefit taken and how old you are when you die.
can I transfer out of a Mercantile Circle SIPP?
You can transfer out from the Mercantile Circle SIPP at any time at no charge from us, however if you make a partial transfer out this is subject to a minimum of £1,000 remaining within the product wrapper. All transfers out are subject to acceptance from another registered pension scheme or QROPS and any rules and charges that may apply.
how do you invest the money I put into my pension?
At Mercantile Circle our globally diversified portfolio comprises a mix of asset classes and investments, carefully chosen by our expert team and our partners – this is what is known as a ‘managed portfolio’. The investments are then put together based on your individual risk profile and circumstances. We constantly monitor and track the global markets in line with your portfolio, making adjustments and rebalancing where appropriate.
Our aim is simple – to generate you as much income as possible from your savings or investments, whilst minimising the risks. This is one of the many reasons why we believe that intelligent, long-term asset allocation is a far better investment approach than trying to pick a single company that may outperform its competitors. From commodities, through to property and leisure, our sectors span industries across the globe. They may change from time to time as a result of the sectors performance and the wider global economy.
i can’t find information on my current pensions?
You’re not the only one – trying to locate numerous pensions may seem like a minefield. The government provides an easy-to-use Pension Finder service to help.
Disclaimer: The investment projections we show are never a guaranteed predictor of future performance – they are there to give you context and help you make decisions about the kind of portfolio which may best suit your individual investment goals. You should not base your investment decision on past performance. With investment, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. If you are unsure if any of our products are the right choice for you, please seek independent financial advice.
Mercantile International Limited is an Appointed Representative of Agincourt Financial Limited who is Regulated in the United Kingdom by the Financial Conduct Authority with Firm Reference No.:197236. Company Registration No.: 09929738 in England & Wales | Mercantile Circle is a trading style of Mercantile International Limited.