During a working lifetime, significant assets are usually accumulated within pension arrangements. There has been a sharp reduction in the number of “final salary” pension schemes (which commit an employer to providing a percentage of an employee’s income when they retire) as they are very expensive for employers to provide. Most current pension schemes are known as “money purchase”, where benefits are dependent on the amount paid in and investment returns.

Most employers and employees are now required to contribute a percentage of salary to the employee’s pension plan. For eligible employees, the current minimum contribution level is 8%, with at least 3% coming from the employer.

While this is a welcome basis for pension provision, it is not likely to provide adequate income in retirement and most of us should pay additional contributions either into the employer-sponsored scheme or a separate arrangement. Self-employed workers are not currently required to contribute to a pension plan but should make their own arrangements. As with other workers, tax incentives encourage this.

It is likely that you will accumulate several pension plans during your working lifetime. InSight can review your pension plans to ensure you are on track to reach your retirement goals and to assess if there would be a benefit in consolidating the arrangements to help with your retirement planning.

Drawing from your pension plan

At any time after age 55 (age 57 from 6 April 2028), you may withdraw up to 25% of your pension plan value as a tax free lump sum. For most people, this will be subject to a maximum amount of £268,275. The remaining value may be used to provide (taxable) income and there are many options available.

At InSight, we have considerable experience in designing and implementing income strategies to suit a variety of different circumstances. The potential solutions are as varied as the clients we advise.

In all circumstances, we start with a detailed analysis of cashflow, which is an assessment of how your income stream and outgoings are expected to evolve in the periods before and after retirement. That forms the basis for a discussion on the withdrawals you are likely to require from your pension plan and/or other assets.

There are several methods for making income withdrawals from pension plans. One option is to buy an annuity which could provide a guaranteed income for the rest of your life; or a short-term annuity could provide a guaranteed income for a specific period. The main alternative is known as Income Drawdown which entails leaving your pension plan value invested and making periodic withdrawals as and when required. This option is more flexible with potentially greater rewards subject to ongoing investment performance. Every client will require an individual plan of action.

The rules and regulations regarding pension plan withdrawals are constantly changing so it is important to review your arrangements regularly.