What is a pension plan?

A pension plan is a tax-efficient investment plan to help you save money for later in life. People typically use their pension savings to replace their working income as they retire, but you don’t have to do this and can even take your pension before you retire from work.  

There are two types of pension:

• defined benefit scheme - pension benefits are defined in the pension scheme rules rather than being based on contributions and investment returns
• defined contribution scheme - you build up a pension pot from contributions paid in and benefits are based on the size of your pension pot

The Coutts Invest Pension is a defined contribution scheme.  You decide how much you would like to pay into your pension pot and build up a pot of assets over time that you can access after you turn 55 (expected to be 57 by 2028).

You can take up to 25% of your pot as a tax-free lump sum, and use the rest in various ways including:

• use some or all of your pot to buy a guaranteed income through an annuity
• use some or all of your pot to draw benefits while remaining invested in the pension plan (known as flexi-access drawdown)

Coutts Invest Pension doesn't currently offer these withdrawal options and you will only be able to transfer your pot to another scheme.

 

Why save through a pension scheme?

Even if you think you will have enough money later in life, it can still make sense to save through a pension scheme. There are specific advantages to pensions that can help you make the most of your money.

1) Tax relief on your contributions

One of the key advantages to saving money in a pension scheme is the tax relief you receive on contributions.

Generally, basic rate tax should be added by the scheme provider to contributions paid into a personal pension. If you pay above the basic rate band, you may be able to claim further tax relief through your Self Assessment Tax Return. This will reduce your overall tax liability rather than be added to your contributions.

If you are a higher rate taxpayer you can apply to have your tax code adjusted rather than reclaim tax through your Self Assessment.

There are limits on the level of contributions that attract tax relief.  For most people this will be your relevant UK earnings each year, with a cap at the Annual Allowance, which is currently £40,000.

There are some factors that can affect the Annual Allowance – for example, people with annual taxable income plus extra pension contributions received from an employer of more than £240,000 per annum and people who have already taken certain benefits from a pension.

But even with these limits, the tax relief for pension contributions makes them an efficient way to save.

Find out more about tax relief on contributions

2)    Tax-efficient investment

Once contributions to your pension scheme are invested, they’ll potentially grow largely free of taxes until you decide to draw your retirement benefits. The tax treatment of pension funds means that they should grow faster than equivalent taxable funds.

3)    Tax free lump sum

When you decide you want to take your pension benefits, current rules allow you to take up to 25% of your pension pot as a tax-free lump sum. Compare this to an ISA, which allows you to take 100% of the fund tax free, but you don’t get the tax relief on your contributions (with the exception of Lifetime ISAs).

Investing outside of a pension or ISA means you may have to pay income tax on any dividends and capital gains tax when you cash your investments in.
 

Is there a limit on the size of the pension pot I am allowed to build up?

There is no limit on the size of the pension pot you are allowed to build up, but you have a lifetime allowance (£1,073,100 in the 2021/22 tax year) on the maximum amount you can accumulate in pension benefits from your pension plans.  If you receive benefits from your pension plans above the lifetime allowance, you may be subject to a lifetime allowance charge.

The lifetime allowance charge can be up to 55% of anything you receive over your lifetime allowance. It is therefore very important that you keep your pension savings under regular review.

Find out more about the Lifetime Allowance
 

How much should I pay into my pension?

Pensions should be understood in the context of the rest of your financial planning. You should think about how much you can afford to contribute regularly, while taking into account your age – you can’t take money out of your pension scheme until you’re 55 (this is expected to rise to 57 in 2028), and many of the benefits of adding further contributions to a pension plan are withdrawn after you turn 75.

You should also think about any existing pension savings you have and how close you are to your Annual and Lifetime Allowances.

The Coutts Invest Pension can only accept contributions from your own personal account.  It cannot accept employer or third party contributions.
 

What are the investment options in a Coutts Invest Pension?

Coutts Invest Pension lets you invest your pension pot in one of five Personal Portfolio Funds. Some investors are looking for a more dependable return that just protects the spending power of their money. Others are willing to accept less certainty and a greater possibility of losing money for a chance of higher growth. Our range of five funds aims to provide an option to suit your preferences.

You should keep your plan under regular review to ensure it continues to be right for you. The level of risk you are prepared to take with your investment may change over time.
 

CAN I MAKE WITHDRAWLS FROM MY COUTTS INVEST PENSION?

You can’t withdraw money from a pension until you are 55.  This is expected to increase to 57 from 2028.  There are also limits on how you can withdraw money from a pension.

Coutts Invest Pension doesn't currently offer these withdrawal options, but we are working on a solution.  In the meantime, you will be able to transfer your pot to another scheme.
 

When can I start taking benefits from my pension?

You can start taking your pension benefits from age 55 (this is due to increase to age 57 in 2028). You don’t have to stop working in order to take your benefits.
 

How can I take my pension benefits?

When you want to take your pension pot from Coutts Invest, you will be able to transfer it to a pension scheme that provides options for using your pension. Coutts Invest Pension doesn't currently offer these withdrawal options and you will only be able to transfer your pot to another scheme.

Your options may include:

• Take it as cash – you can take up to 25% of your pension pot tax-free and pay tax at your marginal rate on any cash you take above this amount
• Use some or all of your pot to buy a guaranteed income, called an annuity
• Use some or all of your pot to draw benefits whilst remaining invested in the pension plan (known as flexi-access drawdown)

You can choose some or all of the above options, whatever suits you.

How you choose to take your pension benefits will be a very important decision.  You may find it helpful at that time to seek guidance or advice. As well as talking to your private banker, you can get free, impartial guidance to help you understand your options from the government's Pension Wise service online at www.pensionwise.gov.uk, over the telephone on 0800 138 3944 or face-to-face.
 

What happens if I die before I start taking benefits from my pension?

If you die before you take your money out of your pension pot the value of your pension pot will be paid out at the discretion of the trustees who will take account of your wishes.

If you die before turning 75 this will be paid as a tax-free lump sum.  If this is after you've turned age 75, whoever gets the money will have to pay tax based on their marginal rate.

As our pension plan is written under trust, the payment may be free of inheritance tax. However, please note that, in certain circumstances, contributions made and transfers into your Coutts Invest Pension within 2 years of death may be considered by HMRC to form part of your estate for inheritance tax purposes.

Coutts Invest Pension lets you nominate who you would like to get your pension pot. This could be individuals or organisations, and you can nominate that your pot be distributed between multiple beneficiaries.
 

Risk warning

As we do not provide tax advice, you should seek independent tax advice as required.  The comments provided above are based on our understanding of current tax law which applies to UK resident and domiciled individuals not subject to tax elsewhere.  Tax law is subject to change, including with possible retrospective effect.  The availability and value of any tax reliefs will depend on your personal circumstances.

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. The information in this article should not be regarded as financial advice.