No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii.
Email your questions to email@example.com
Tim Day asks: I have consolidated various former employers' Defined Contribution (DC) pension schemes in a SIPP on the interactive investor platform.
The five-year freeze to the Lifetime Allowance (LTA), announced in the latest Budget*, is making me ponder the increased likelihood of reaching and exceeding that amount.
It would be clear enough if SIPPs were my sole pension and there was a straightforward asset value, but my situation is complicated by having about a decade accrued in two Defined Benefit (DB) schemes from earlier in my career. How should I account for the value of those?
Presumably, I should contact the schemes and ask them for some sort of valuation, but what exactly should I ask them for, and if I did have such a valuation is there any way of predicting how it might evolve in future?
Thanks for any pointers, Tim
*On 3 March 2021, chancellor Rishi Sunak said the LTA’s annual link to the Consumer Price Index increase would be removed for the next five fiscal years. This will maintain the standard lifetime allowance at £1,073,100 for tax years 2021 to 2022 to 2025 to 2026.
Becky O’Connor (pictured above), head of pensions & savings, interactive investor, says: You are right in thinking that your DB schemes would count towards your Lifetime Allowance and that this would require valuations from your providers.
Defined Benefit scheme providers usually come up with a notional capital value for DB pensions by multiplying your retirement income (by 20) and adding the value of any tax-free cash lump sum.
It would be the valuation at the point you first access, or ‘crystallise’ your pension that would be taken into account for calculating your pension value in relation to the LTA.
- State pension set for biggest hike in 10 years
- Examine the pension saving habits of investors at different life stages
- For more pension news and investment insight click here
There are two points at which this valuation occurs – when you first access your pension and when you are 75.
In terms of predicting what the whole pot will be worth – this is tricky as it will depend on investment growth as well as how much you contribute. Mid-range forecasts are given on annual statements, but the eventual outcome can be higher or lower.
At the point of leaving your schemes, you should have been provided with a statement of benefits which would show benefits accrued to the date of leaving, then a projection of what your deferred pension will be at the Scheme Normal Retirement Date (NRD). If you don’t have these, you should request copies from your providers, which should give a good indicator and the annual rate of pension where the factor is then used to get the value.
Given your concerns, we would suggest that you either seek the guidance of a suitably qualified financial adviser, or speak with your accountant who will be able to provide you with the advice you need, based on your own personal circumstances.
- Pensions versus ISAs: a beginner’s guide
- Discover more Don't be shy, ask ii questions here
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
If you suspect you might end up over the LTA threshold, keep things under close review. If you go over, you have to pay a tax charge – it is not an absolute limit beyond which you can no longer make contributions.
In some cases, it can be worth continuing to pay in, despite going over the LTA limit.
You can read more about the Lifetime Allowance here.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future. If you are uncertain about the tax treatment of the products you should contact HMRC or seek independent tax advice.