Risk warnings

Highlighting the risks that come with saving for your future and providing you with the right information and support when you need it

Avoid risk when saving for your pension

There are many important steps on the road to saving for your future. We know that there can also be risks along the way. It’s important that we highlight these risks to you and provide you with the right information and support when you need it.

Below we’ve highlighted the key details you need to be aware of for each step on your journey to financial stability.

Starting to save

A pension is a way of saving for your future. The more you save for your future, the more likely that you’ll have the lifestyle you’d like to have when you retire.

  • The minimum retirement age is 55, which means you cannot take your pension savings out at any point before this (unless for ill health reasons). There may be exceptions to this rule if a member has benefits that have been transferred in from another scheme that had a Normal Minimum Pension Age of 50.
  • The minimum retirement age is due to change in the future and the next increase is scheduled for 2028, when it will increase from 55 to 57.

Building your pension savings

The minimum contribution rates introduced under auto enrolment rules are designed to encourage saving for your retirement. You should regularly review how much you are contributing to your pension savings to make sure that you will meet your expected retirement income needs.

  • If you do not review your contribution levels regularly, then your pension savings and retirement income may not be at the expected level when you retire.
  • You may find that regularly increasing your contributions can help your pension savings meet your expectations. You could also find that gradually increasing your contribution percentages each year makes it easier to save without noticing the loss of income too much.

Deciding to opt out or cease membership of your employer’s workplace scheme

If you decide to opt out or cease membership of your employer's workplace scheme, doing so will have an impact on the future value of your pension savings.
If you opt out of or cease membership from auto enrolment:

  • your pension savings may be less than you need
  • you may lose a valuable part of your workplace benefits by giving up employer contributions
  • you may be more reliant on the State Pension in retirement
  • you will miss out on government tax relief

Please note: If you are still employed by the same employer, you will be re-enrolled roughly every three years if you meet the relevant criteria.

Taking your pension savings

There are important topics to consider before taking your pension savings.

  • If you take your pension savings early, it may reduce the amount that you have available in your retirement fund and the length of time for which your fund is invested. It may also mean that  the amount you have in your retirement pot will need to last longer.
  • Taking your pension savings early could affect your retirement income planning. You should be aware that once you have started taking your pension savings, the maximum amount you can pay into any defined contribution pension schemes will reduce to £4,000 per year (2021/2022 tax year). This may impact on what happens if you continue to remain employed and are re-enrolled in future or if you start a new job and are automatically enrolled.

Other factors to consider

Seeking financial advice

A financial adviser can assess your personal and financial circumstances carefully and give recommendations based on your individual circumstances. A financial adviser has the knowledge, skills and experience to review your investment objectives, current and future income requirements, existing pension assets and attitude to risk, in order to come up with the best retirement option for you. You can find a financial adviser through Unbiased’s website.

Guidance on retirement benefits from Pension Wise

Even if you do not want to obtain advice from an independent financial adviser, if you are aged 50 or over you can still receive pension guidance tailored to your individual circumstances from Pension Wise, which is a service provided free of charge by the government.

By contacting Pension Wise, you will receive information on the options available to you regarding your pension savings and retirement benefits. Pension Wise will look at your personal situation and advise you on the choices that best fit your position in the current climate.

Visit the Pension Wise website or call 0800 138 3944 to book a free appointment with one of their advisers.

Dependents and sustainability of your retirement income

Your pension is designed to help support you financially in your retirement. This could be for a long period of time, so it’s important that you make your pension fund last as long as possible.
You don’t need to take benefits at your nominated retirement date.

You should consider if your pension savings are likely to provide you with the income you require when you retire, and how accessing benefits will affect how long the fund lasts in the future.

If you spend your entire pension fund in the early years of retirement, you could have little or no money left to support your standard of living in later life. This is irreversible and could impact not only on you, but also your family, should they be financially dependent on you.
 
If your main concern is to provide benefits for your dependants, the amount they will receive will be affected by the decision you make in relation to accessing your pension savings or leaving your pension as it is. Accessing your benefits before your nominated retirement date will affect your ability to fund income later in life or beyond for your dependants or beneficiaries.

Your state of health at retirement

If you’re suffering from ill health at the time of taking your retirement savings, you should seek guidance from Pension Wise or financial advice from an appropriately regulated financial adviser as mentioned above.

Ill health could mean you can access your pension benefits early, or that you are eligible for ill health retirement options. These may include enhanced/ill health annuities which could be in the form of a fixed term or lifetime income in exchange for a lump sum from your pension which takes into account your ill health.

Taking benefits for any other reason than providing you with an income in retirement

Your pension is there to fund your expenses in later life when you no longer wish to work or when you are not able to earn an income to live on. There are risks from taking your money out of your pension too quickly which may affect how long your pension savings actually last. You should be aware that making decisions based on circumstances now can have effects on your financial wellbeing in the long run.

Tax implications of taking retirements benefits

You can usually take up to 25% of the value of your pension pot tax-free*, but any withdrawals above that are deemed as taxable income and will be subject to income tax accordingly.

You should therefore consider your own personal tax circumstances and think about what is the best option for you to access your pension retirement fund. Taking a large amount of your pension income in one go may mean that more is deducted as tax compared to taking it in smaller stages.

Taking a taxable lump sum from your pension could have an impact on the overall amount of tax you will pay – for example, depending on the amount withdrawn, it may put you into a higher tax bracket than you would normally be in, meaning that any income you receive from other sources will be subject to greater tax deductions.

*If you have an entitlement to a protected tax-free cash lump sum, you may be able to take a tax-free lump sum which is greater than 25%. The scheme administrator at the time may have checked whether this applied to you in April 2006 and recorded it against your records. If you have not received written confirmation but think you may have qualified for protected tax free cash as at April 2006, you should contact Smart Pension for clarification.

Means-tested state benefits

If you are in receipt of state benefits or any other source of financial support that is means-tested, taking benefits from your pension could result in these being withdrawn if you hold over a certain amount in savings and investments. It is important that you seek appropriate advice and guidance before accessing funds from your pension. When you take money out of your pension, it becomes personal savings and this means it would be included in any calculations for means-tested support.

Long-term care

When you take money out of your pension, it is classified as personal savings. If (after taking your benefits) you need to go into long-term care, your local authority will take these personal savings into account when calculating the financial support that you may be entitled to. This could result in you having to make a larger contribution to your long-term care costs, or having to fund them entirely yourself.

Debts and bankruptcy

Once pension savings are paid to you, the money is classified as personal savings. If you subsequently default on a debt or become bankrupt, your creditors will have a right to this money because it belongs to you.

Taking your pension savings as a lump sum

If you take all your pension savings as a lump sum under the Small Fund Commutation rules (up to £10,000), you will receive 25% of your pension savings tax-free. The remainder of your pension savings will be taxed at your marginal rate of income tax.

You may also be able to take your pension fund as an Uncrystallised Fund Pension Lump Sum (UFPLS). You will receive 25% of your pension savings tax-free. The rest of your pension savings will be taxed at your marginal rate of income tax.

If you take your pension savings as a lump sum, it could affect how much you pay in income tax. You may end up paying too much, or not enough, and you will need to talk to HMRC to agree your correct income tax position.

Taking a flexible income (income drawdown)

If you take your pension savings as a flexible income, you will receive 25% of your pension savings tax-free. The remainder of your pension savings will be taxed at your marginal rate of income tax. Please note that if you take your pension savings as a flexible income, doing so could affect how much you pay in income tax.

If you take your pension savings and then invest them in other savings products, you may not receive the same tax relief.

Any pension savings you do not take will continue to be invested and the value will be subject to market fluctuations. Any pension savings you leave invested in your Smart Pension account will still be subject to charges.

Using your pension savings to buy an annuity

If you would like to buy a guaranteed income, you should be aware that a range of different annuities is available, each offering different features. This means you should shop around to find the best option for you.

If you are in ill health or suffer from/have suffered from a medical condition that is likely to reduce your life expectancy, this may enable you to obtain a higher starting annuity income.

If you do not choose an annuity which goes up with the increases in inflation each year, there is the risk your retirement income may not maintain its spending power, especially over the medium to long term.

Once you have bought a guaranteed income, you can’t change your mind. This means you won’t have the flexibility to change your income if your circumstances change.

Further pension contributions

If you want to access your pension savings but also want to continue to contribute to a pension, you should take care and it is worth seeking guidance and/or financial advice first. Depending on how you access your pension, this could reduce the maximum you are allowed to continue to save into a pension. It could also limit your ability to use up any unused contribution allowances from the previous three tax years.

Accessing your pension may also have the effect of reducing your annual allowance. This is the total amount of contributions that can be made to all pension schemes in the year.

Accessing income through Flexi Access Drawdown or Uncrystallised Funds Pension Lump Sum will reduce your annual allowance (into money purchase schemes) from £40,000 to £4,000 (2021/2022 tax year). You should make sure that you are not ‘recycling’ your pension money (taking it out of one pension to put into another) because doing so could incur a tax charge.

Charges and Fees

There may be higher associated costs involved in buying and selling of investments if you are intending to reinvest your pension savings personally. You should consider the impact of these charges on your retirement fund.

Delaying taking your pension savings

Even if you have reached age 55 (or your selected retirement age if greater), you don’t have to access your pension savings. Many people decide to keep on working full-time until they're ready to retire or to reduce their hours, and continue to contribute to their pension during this time. Doing so could help boost your pension savings during the last few years of your working life.

Transferring out

If you transfer pension savings out of your Smart Pension account, you will not need to pay exit fees.
However, you may need to pay costs or fees to transfer your pension savings into another pension scheme. The charges you pay in other pension schemes may be more than the charges you pay with Smart Pension.

Please note, once you have transferred your pension savings out of Smart Pension, you cannot reverse the process.

If you transfer pension savings out of your Smart Pension account, you will not be able to take your remaining pension savings as a lump sum for three years from the date of any transfer out.

Transferring in

Not all other pension schemes are suitable for transfers into Smart Pension. We do not accept transfers from Defined Benefit schemes.

Transferring your pension savings into one place may affect your ability to take your pension savings as a Small Fund Commutation payment if the total amount is likely to exceed the £10,000 limit.
If you transfer your pension savings to Smart Pension, the annual management charges and monthly fees may differ from your original pension scheme.

You should check that your old pension scheme does not have any additional benefits or guarantees that you would lose if you transferred your pension savings to Smart Pension.

You should also check if your previous pension provider will charge you for transferring your pension savings.

General risks

The level of tax relief available on pension contributions up to the age of 75 will depend on your individual circumstances and may change in the future. You are not entitled to tax relief on any contributions you pay after your 75th birthday. Any tax rates used or mentioned in communications to you are in accordance with our understanding of the tax rules at the time.

You are strongly advised to obtain further information and guidance on retirement options and transfers. You can find further information from the following sources:

  • You can visit our website to learn more about your Smart Pension account and your retirement options.
  • Further information about what schemes/trustees need to consider, when a member is thinking about taking retirement benefits, can be found onThe Pensions Regulator’s website.
  • You can also learn more about pension scams and how to avoid them by visiting The Pensions Regulator’s website.
  • You can book a free appointment to discuss your options at retirement with the free and impartial government service, Pension Wise.
  • You can find more guidance about your pension savings at The Money Advice Service.
  • You can also take a look at The Pensions Advisory Service for free and impartial information to help you understand your retirement options and make the right decision.

Beware of pension scams

As your Smart Pension account grows, so too does your risk of losing your money through one of today’s increasingly sophisticated scams.

Watch out for text messages, letters, emails or phone calls offering to help you with your pension, particularly if you’re promised big returns. Unsolicited cold calls, emails, texts and door visits about your pension became illegal in January 2019. If you receive one, it is very likely to be a scam.

You might be put under pressure to make a quick decision or to take a cash inducement. If you do transfer to a fraudulent account, you could face a big tax bill for withdrawing your pension savings, even though you may have lost the money.

To learn more about how pension scams work, take a look at the FCA's Don’t let a scammer enjoy your retirement leaflet.

For more information about how to protect yourself from scams, visit The Pension Regulator’s website. If you suspect a scam, report it to the Financial Conduct Authority’s consumer helpline on 0800 111 6768 or Action Fraud on 0300 123 2040.

You can also contact the MoneyHelper service, who will be able to provide guidance, on 0800 011 3797 or on the MoneyHelper website.

Shopping around

It is important to shop around and consider all the retirement options because other providers may offer products that are more appropriate to you and your circumstances.

This is particularly relevant if you are proceeding with buying an annuity, which is a guaranteed income in exchange for your pension fund. That’s because annuity rates and costs can vary considerably between providers, particularly if you are a smoker and/or have health issues. You will need to take into account all of the different options available to you including, for example, whether you have an income which increases with the cost of living. It’s your retirement and your choice, so please seek guidance and advice to find the best options for you.

If you don’t currently have a financial adviser, but would like to speak to one, you can find one at www.unbiased.co.uk.