Pensions

What income will you need when you retire?

The best place to start when planning for retirement is understanding what you may require to spend. With retirement often being some way off this is not always easy to calculate. By the time you reach retirement some of the larger financial costs such as a mortgage, the costs of commuting, and children have usually passed. With this in mind a good starting point to consider is about half to two thirds of salary. However everyone has different needs and goals in retirement such as the frequency in which you holiday or how often you may change the car.

With our handy retirement calculator we can assist you in determining what you may need to live off in retirement. Head to our contact page page to book an appointment with one of our Wealth Managers.

How can I make sure I have enough in retirement?

Work out what other income you may receive from other sources e.g. state benefits and occupational schemes. You can find out your current provision using the government’s online State Pension Forecast to give you an idea of the value of your pensions.

Consolidating existing pensions can help to not only cut down costs but also see your retirement picture more clearly. This can be fairly simple to do however seeking advice is vital as you need to first check that you will not lose any valuable benefits or incur any excessive exit charges when transferring funds.

Topping up your pension via a monthly contribution or lump sum payment can be extremely effective in helping you reach your goals. This is especially true if your employer will also contribute into your pension for you.

Take Action Early

If you want to make sure you have enough come the day you retire, contact us today for a free consultation without any obligation.

When coming to retirement there can be an overwhelming amount of information about the choices you are faced with. Here we aim to simplify things and give you the basics.

When can I take benefits from my pension?

Most pension schemes allow you to take your money from the age of 55. This can be used to provide an income in retirement or, if you are still working may assist in supplementing your salary enabling you to work fewer hours. In some circumstances you may even be able to take your benefits earlier than 55 due to poor health or by being in a profession where retirement begins at a younger age.

What are my options when taking income in retirement?

The options available to you when taking your income in retirement may differ depending on your pension scheme or provider. However, under the new pension freedom rules you can mix any of the options listed below using different pensions or even different parts of the same pension.

• Leave your pension untouched – Letting your pot accumulate and grow tax-free will potentially provide you with greater income when you choose to access it.
• Taking a flexible income in retirement via Flexi-Access Drawdown (FAD) – You can take 25% of your pension pot as a tax free lump sum and re-invest the remaining funds to provide you with a regular taxable income in retirement. You decide the income you wish to receive and have the flexibility to start and stop this as you like.

The main difference between this option and a lifetime annuity is that although flexi-access drawdown gives you greater flexibility, the income isn’t guaranteed for life and investment performance plays a significant part in what income you can receive. However, by carefully managing the investments within your pension with the assistance of a Henry Spain Wealth Manager, this can be simple and easy to manage giving you control and flexibility over your income in retirement.

• Purchase a guaranteed annuity – One option is to take 25% of your pot as a one off tax-free lump sum and use the remainder to purchase a taxable income for life – called an annuity. There are a variety of different annuity options available which can affect the level of income you receive in retirement. In addition, you also have the option to provide an income for life for a dependant or beneficiary such as a partner should you die.
• Small cash withdrawals–Uncrystalised Fund Pension Lump Sum (UFPLS) – It is possible to withdraw cash as and when you require and leave the rest untouched (uncrystalised) and invested where it can continue to grow tax free. Each withdrawal is treated separately with the first 25% being tax-free and the remainder being regarded as taxable income. However, one thing to bear in mind is that there are tax implications which would need to be considered.
• Withdraw the entire pot – One option would be to take your entire pot as cash in one lump sum. The first 25% would be tax free and the remainder would be taxed at your highest tax rate. Therefore there are considerable tax implications when considering this option as the payment will be added on to your current income. Further still, there are significant risks associated with this option such as a large tax bill, no income will be paid to you or a dependant in the event of death, and you may run out of cash to fund your retirement.

Mixing your options – It is possible to mix the options available to you when taking income from your pension by taking income in different amounts at different times depending on what suits your specific needs. You can even continue to save into your pension and receive the associated tax relief up to age 55.

Getting Advice

If you’re over 50 and considering taking all or part of your pension you can give us a call. Our Wealth Managers offer an initial consultation which will help you to fully understand your options. We will be able to recommend which option may be best suited to you based on your needs and goals.

A Self-Invested Personal Pension (SIPP) is a tax wrapper that allows you to save efficiently for your retirement. You get the same tax reliefs as you do when contributing into a personal pension but the big difference is the extra flexibility on investment choice, as well income at retirement.

If you don’t like the idea of purchasing an annuity then a SIPP can give you the option to take your tax free cash at retirement, and drawdown income at the rate you want within the government’s allowable guidelines. This allows you to delay taking an annuity either altogether or at the time that’s right for you, while hopefully letting your remaining fund to continue to grow.

SIPPs are not right for everyone, but if you like the idea of creating your own bespoke solution that includes whole of market advice and open choice, then a SIPP with us could be right for you.

Tax Relief on Contributions

Tax relief on pension contributions is available to UK tax-payers.  This means that tax you would have had to pay to HMRC goes into your pension instead. You can put as much as you want into your pension however there are annual and lifetime allowances that restrict the amount of tax relief allowable on contributions.

What is the annual allowance?

You can receive tax relief on pension contributions up to 100% of your earnings or the £40,000 annual allowance as of the tax year 2019/2020. Any contributions over this threshold will be subject to income tax at the highest marginal rate.

Can I use a previous year’s annual allowance?

Yes. You can carry forward any unused annual allowances from the previous three tax years, not including the current tax year. This applies as long as you were a member of a pension scheme during those years.

However, there can be occasions where your annual allowance is reduced to £4,000. This is known as the Money Purchase Annual Allowance (MPAA). For more guidance on making contributions in to your pension contact us.

Tax Relief on Capital Gains Tax (CGT)

Any growth made within a pension is considered free of CGT making it a fantastic investment vehicle to accumulate your retirement funds.

Tax Relief on Inheritance Tax (IHT)

With recent changes to pension rules, the tax treatment of pensions on the death of the policyholder has changed. The ‘death tax’ of 55% has been abolished meaning pension benefits can now be paid out in some circumstances tax-free. The result of this – your pension could now act as a  vehicle to mitigate IHT.

Contact us to find out more information on IHT benefits when investing into a pension.

Tax in Retirement

In retirement you still have to pay income tax. This not only applies to your personal pension(s), but also the State pension and any occupational pension schemes you may have. However, some pension income such as the state pension is paid gross (without any tax being deducted). But if tax is due on this, HMRC will collect this from you by deducting this from any company pension payments or when you withdraw money out of an occupational scheme.

How are pensions taxed?

You can take 25% of your pension pot tax-free and the remaining pot which is typically used to provide income (but can be withdrawn as a lump sum) is taxable at your highest marginal rate.

Lifetime Allowance (LTA)

The lifetime allowance is the maximum limit that your pension benefits can be valued at without the possibility of having to pay a tax charge. If your pension is valued at greater than the current lifetime allowance then it will be subject to a hefty tax of 25% if taken as income, or 55% if paid as a lump sum.

As of the 6th April 2016, the lifetime allowance reduces further from £1.25m to £1m following the new changes in the summer budget.  This new change brings with it new methods of protection for individuals who may be affected by this reduction depending on the value of your fund at 5th April 2016.

If you expect your total pension savings to exceed £1.25 million then you may need to apply for protection.  For more information speak to one of our Wealth Managers who can  provide bespoke advice on protecting your retirement fund.