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Whether it’s a pension provided by a workplace, the government, or one a consumer has set up themselves, the majority of consumers will have a pension. Pensions are basically an investment that you pay into on a regular basis. The intention is for this investment to supply you with an income after you decide to stop working. However, things can be a little more complicated than that – a lot depends on the type of scheme you’re using.
In this guide to private/personal pensions, we’ll explore the most common types of pension and identify some key points to note regarding your rights – and some common problems to watch out for.
A small self-administered scheme (SSAS) is a pension scheme usually made by a business for a small group of up to 11 people.
SSASs are typically tax efficient and flexible, making them popular with business owners.
The Financial Conduct Authority has warned that the majority of SSASs are not suitable for retail customers.
Trustees of an SSAS have to be over 18 years of age, and funds can be withdrawn tax-free from the age of 55 and over. You can withdraw your funds as a lump sum or in smaller increments.
You don’t have to be retired to benefit from an SSAS, and you don’t need to purchase an annuity.
You’ll normally pay into your SSAS with cash.
SSAS investment returns are normally free from Income Tax and Capital Gains Tax – and if you die, your beneficiaries won’t normally have to pay Inheritance Tax on the proceeds of your SSAS.
While SSASs are great for business owners, they may not be suitable for retail customers. Some consumers may find they’ve lost money from their SSAS as a result of poorly performing investments.
Additionally, many consumers feel poorly advised as to the exact nature of their responsibilities within the scheme – while SSASs do require a certain amount of independent management by the consumer, they are still administrated (and there are fees associated with this administration).
As with any investment policy, there is a certain level of risk associated with an SSAS. Your advisor should have acted responsibly in informing you of this risk.
If you feel you were badly advised about an SSAS, your scheme may have been mis-sold. If so, you should use Resolver to raise your issue with the organization that sold you the scheme. If they are unable to resolve the issue to your satisfaction, you can escalate your case to the Financial Ombudsman.
While it may seem that SSASs are managed exclusively by the consumer, they do usually require a certain amount of administration – and there is typically a fee for this.
This administration fee may change from year to year. If you were not advised that there would be a cost associated with the administration of your SSAS, your scheme may have been mis-sold.
A SIPP is basically a DIY pension – you choose how your savings are invested and have full control over them. With a SIPP, you have a much wider range of options available to you. However, with any investment comes risk – and you stand to lose money from your pension fund. There are also charges associated with SIPPs, and these may be particularly high if you choose to invest in property or other specialist investments.
Income drawdown (otherwise known as an unsecured pension) is where you leave your pension pot invested and draw your income directly from the invested amount. Income drawdown policies are either “capped”, meaning you can only withdraw a certain amount every year, and “flexible”, where you can take out as much as you want every year (provided that certain conditions are met).
In order to use a flexible policy, you have to have a guaranteed income of £12,000.
Income drawdown schemes offer an alternative to annuities, as you will not usually pay income tax on funds withdrawn through income drawdown. Income drawdown also provides a way to access the funds tied up in your pension prior to retiring.
There are often significant costs and charges associated with income drawdown schemes. These charges vary between policies, with some firms charging £1000s more than others.
The value of your fund is also held in a series of long-term stock market investments. These are, however, subject to short-term dips – if you withdraw money at the same time as the stock market value of your fund is dropping, your fund is less likely to recover when the market improves again. The smaller your fund, the less chance for growth (since there is less money that can be invested).
Income drawdown can be extremely complicated, and can involve potentially high costs and charges. If you were not advised that you would incur costs, you may have been mis-sold the scheme.
Additionally, if you consistently withdraw large amounts from your pension funds, you may find that you use up your savings too fast. This is an underlying risk of drawdown schemes, and many providers now recommend that you do not make excessive withdrawals.
Buyout pensions (which are also known as Section 32 policies) are policies that are usually bought from an insurance company with money taken from a standard registered pension scheme. You then cannot pay any more into the buyout pension.
This is intended to provide an annuity for some point in the future (meaning it will pay out a yearly sum from then on). The tax rules are pretty much the same for buyout pensions as they are for your typical personal pension.
Generally, you’d use a buyout pension if your occupational pension is about to wind up, or if you’ve left the job associated with the occupational scheme and you don’t want to move your money into another occupational pension.
Any money in your pot after retirement is used to pay you a Revalued Guaranteed Minimum Pension (RGMP) which will include a 50% spouse’s pension in the unfortunate event that you die, according to law, and then the remainder can be converted to a further pension, converted to a tax-free lump sum payout, or a combination of the two.
By law, buyout pension schemes have to pay out a certain amount at retirement age (the Guaranteed Minimum Pension or GMP). If they don’t, you should raise your issue with your pension provider via Resolver. If the company is unable to help, you should escalate your case to the Financial Ombudsman. If there is only enough money left in the pot to pay you a GMP, the pension provider is under no obligation to pay you any more than that. However, your GMP should still pay out 25% tax free cash.
An FSAVC is an arrangement that allows contributions to be invested and can be used as a separate policy to complement an occupational pension scheme. It isn’t connected to your employer’s pension scheme, and is a money purchase (defined contribution) scheme – meaning it pays out on retirement based on the amount of money that has been paid in. These policies are generally fairly tax efficient.
FSAVCs can be fairly complicated, and you could very well have been mis-sold a policy.
If you weren’t told that you could make additional voluntary contributions to your scheme, were not informed about the higher costs involved in an FSAVC, weren’t properly informed on the distribution of the invested funds in your FSAVC, or weren’t told about contributions made by your employer, you may have been mis-sold the policy.
Pension mortgages are a way of building up a lump sum to pay off a mortgage by using the tax concessions given to pensions.
This is, however, risky.
Since the funds in your pension will be invested, you’re banking on market performance to deliver the funds to pay off your mortgage. This means that there’s a chance your investments will underperform and you’ll be left with insufficient funds in your pension to pay off your mortgage.
If you weren’t advised that your pension mortgage carried a risk, or were told that it was a guaranteed way of paying off your mortgage, you may have been mis-sold the policy.
Occupational pension transfers and opt-outs
A pension transfer is a transfer of money from any occupational pension scheme or guaranteed pension to a personal pension, deferred annuity policy, or a defined contribution occupational pension scheme.
By law, any transfer of more than £30,000 has to be advised on by a suitable authorized adviser before the transfer can be made.
Group pension plans work in a similar way to your usual work pension – but with some key differences. While your employer picks the pension provider that runs your scheme, the contract for the scheme is directly between you and the pension provider (rather than being between your employer and the provider).
You can access your pension from the age of 55 and up in the usual manner.
You can raise issues with 45 companies in Pensions (Private/personal) services
Key companies include: