Retirement & Pension Planning

Pension legislation has changed drastically over the years and for many this can be an area that presents a number of confusing possibilities.

Planning for your future is important and contributing to a pension is the most tax efficient way of providing for your future. Due to the introduction of the Pension Freedom Rules your pension has not only become a means of providing an income in retirement, it has also become an important tool in respect of passing your wealth onto your beneficiaries.

Building a long- term relationship helps us to understand what is important to you, keep you well informed and enable us to help you build for your future. We will also guide you through the maze of options that are available to you at retirement.

Ensuring that you consider all the options and making the right choice is important as this can make a significant difference to your future.

The Value of Retirement Planning

We all know it’s important to plan for retirement, but many of us are still not planning well, or early enough.

Despite all the media headlines and Government initiatives, many of us still have a ‘tomorrow will do’ attitude. This is worrying for one simple reason – we are going to live longer than most of us think.

Those approaching retirement today have many more opportunities and challenges to face than their parents ever did. There are also many more ways to fund retirement, adding to the confusion about how to best prepare for all your needs.

Live long

In 1900, life expectancy at birth in the UK was only 46 years for men and 53 years for women. Just over a century later life expectancy at birth has increased by around 30 years. By 2014 it had reached 78.7 years for men and 82.6 years for women (source: Continuous Mortality Investigation Bureau).

Clearly, life expectancy is increasing, and the higher likelihood of us living longer into retirement presents an important question - will we have enough money to enjoy the lifestyle we desire and to last us, once we have stopped work?

...and prosper?

Some of us are planning our pensions. But few of us plan for ‘late retirement’. This is a period from our mid-70s and onwards, when our expenses can rise faster than our pension income can keep up with.

This can happen for various reasons. It could be because we need more help around the home or even that we require nursing care. Then there are unexpected expenses like replacing the roof, health care, or financial help for our families.

But these days, it’s just as likely to be because the older generation is leading a more active life through travel, work or leisure.

And don’t forget our old enemy – inflation. It continually eats away at the value of our money over time.

Forward planning

This problem has been at the root of much of the recent innovation in the retirement market. Getting sound financial advice throughout the different stages of retirement will help identify which products can help you achieve the income you need.

Although it may seem a long way off, making robust financial plans now for late retirement will give you the peace of mind to enjoy your early retirement years - safe in the knowledge that you will be able to live the lifestyle you desire further down the line.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

This article (The Value of Retirement Planning) is intended to provide a general appreciation of the topic and it is not advice.

Article expiry: 05 Apr 2019

What is a Personal Pension?

Personal Pensions may be suitable if you're employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.

You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.

Funds are usually run by financial organisations like banks, insurance companies, and unit trust companies. 

The final value of your pension fund will depend on how much you have contributed and how well the fund's investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.

Contribution Levels and Tax Relief

The Annual Allowance for pension contributions is £40,000pa from 6 April 2018. This figure includes total employee, employer and third party contributions.

Tax relief on personal contributions is given at up to the individual's highest marginal rate. This means that high-earning individuals can receive up to 45% tax relief on their contributions. However from 2016/17 onwards the £40,000 annual allowance is reduced for those with threshold income (taxable income excluding pension contributions) over £110,000 and adjusted income (taxable income plus employer pension contributions) over £150,000. The annual allowance is reduced by £1 for every £2 of adjusted income over £150,000 down to a minimum annual allowance of £10,000 (reached when adjusted income is £210,000 or more).

If total contributions exceed the annual allowance the excess is added to the individual's income and taxed accordingly. The tax can either be paid by the individual or in some cases can be paid by a deduction from the pension plan (known as 'scheme pays').

You can carry forward unused annual allowances from the previous three tax years (ie. back to 2015/2016 for 2018/19), potentially allowing contributions of up to £160,000 in a single tax year for some people. HMRC has confirmed that you do not need to have made a contribution to a registered pension scheme in a tax year to be able to carry forward unused annual allowances from that tax year, but an individual must have been a member of a registered pension scheme at some point during the earlier tax year. The definition of a 'member' includes an active member, a pensioner member, a deferred member; or a pension credit member.

If you wish to carry forward unused annual allowance from previous tax years, you will need to have used up the annual allowance for the current year.

For each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

Higher-rate Taxpayers

If you're subject to the higher tax rate of 40 per cent (up to 45% for additional rate taxpayers), you'll still get 40% or 45% per cent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:

  • You pay your contributions after deducting 20% tax relief and this 20 per cent tax relief is claimed back from HMRC by your pension scheme and added to your plan
  • It's up to you to claim back the other 20 per cent if you're a higher rate tax payer or 25 per cent if you're an additional rate tax payer on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is given to you rather than being added to your pension plan.
  • Your pension fund will invest the money you save (including the basic rate tax relief amount) in your pension. Your pension fund will benefit from growth and income from its investments and these accumulate free from tax.

Drawing your Personal Pension

You can take a pension commencement lump sum of up to 25% of the value of your pension savings (or 25% of your remaining lifetime allowance if less), which is currently tax free, when you reach minimum pension age (currently age 55). The lifetime allowance for the tax year 2018/2019 tax year is £1.03 million.

You then have two main options:

  • Use the rest of the fund you have built up to buy an annuity (a regular taxable income payable for life) from a life insurance company. This does not have to be the same company that you have your pension plan with.
     
  • Take a regular or ad hoc income (taxed at your normal Income Tax rate) from the remainder of your fund while it remains invested (known as flexi-access drawdown).

It should also be remembered that under the new pension flexibility rules, one off lump sums may be available to be taken from the pension plan from age 55 onwards without moving the funds into flexi-access drawdown. These lump sums will be available subject to the scheme rules allowing, and will be 25% tax free and the rest taxable.

Putting Money into Someone Else's Personal Pension

You can put money into someone else's personal pension (eg. your spouse/partner, child etc). You will pay the net amount after deducting 20% tax relief and the pension plan member has tax relief added to their plan at the basic rate. You can’t claim any additional tax relief on your contributions though as the contributions are classed as having been made by the pension plan member (so if they were higher or additional rate taxpayers they could claim some tax back). If they have no earned income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief). For example, if you put £80 into a spouse or civil partner's pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.

The value of units can fall as well as rise, and you may not get back all of your original investment.

Scottish tax allowances and rates may differ. You should consult a financial adviser for more detailed information.

The tax treatment is dependent on individual circumstances and may be subject to change in future.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

This article (What is a Personal Pension?) is intended to provide a general appreciation of the topic and it is not advice.

Article expiry: 05 Apr 2019

Your Retirement Options and Pensions Freedom

Please note that whilst every effort is made to ensure that the information contained within this explanation is correct, these notes are by necessity brief and of a generalised nature. We would provide specific personalised advice prior to finalising any arrangement.

On 6 April 2015 new pension rules came into force, giving you much greater flexibility over how you use your money purchase pension savings and the options you have in retirement.

These changes include the freedom to access the whole of your pension fund, more choice over how to receive the tax-free cash from your fund, changes to death benefits and changes to the contributions you can make.

Whether you have a personal pension, a group personal pension or a stakeholder pension these new rules are far-reaching, and they could have significant tax implications. It is therefore important to take advice on the various options open to you.

Flexi-access Drawdown

The first of the new options is “flexi-access drawdown” which in essence places no limit on the amount of income you can take from your money purchase pension fund once you reach the minimum pension age, currently 55. This means that it would be possible to take the whole of your pension fund in one go, however it may not be tax efficient to do so.

If you will be dependent on your pension fund to support you through your lifetime you may need to consider taking a lower level of income to sustain you.

You will be able to take 25% of your fund as a tax free lump sum if you have not previously used that fund for drawdown purposes with the remainder of the fund staying in your pension to provide you with an income.

It is important to remember that the amount of flexi-access fund withdrawn to provide you with an income will be taxed at your marginal rate of income tax therefore if you take too much income this may move you into the next tax bracket and result in you paying a higher rate of tax.

Uncrystallised Funds Pension Lump Sum

A new option has been introduced by the Government which is called the Uncrystallised Funds Pension Lump Sum (UFPLS).

This option is for funds not already in drawdown and allows you to take a one-off payment from your pension or a series of lump sums leaving the remainder of the fund in your pension invested, the first 25% of each UFPLS is tax free, with the balance being subject to tax.

UFPLS is not available from any part of your pension that is already in drawdown.

How Can I Access the New Pensions Options?

For anyone who was in drawdown before 6 April 2015 (capped or flexible) the new options differ depending on which one you have/had.

Capped Drawdown

Currently, if you are in capped drawdown you will have a maximum level of income that you can take each year and this is reviewed every three years up until you are 75 and annually thereafter.

From 6 April 2015 you are able to continue to take capped drawdown or you have the option to switch to the new flexi-access drawdown whereby the amount of income you can take will be unlimited and there will be no further mandatory maximum income level reviews.

It is important to remember that if you take the decision to move from capped drawdown to flexi-access drawdown and take any income from the flexi-access drawdown fund the maximum amount you can contribute to money purchase pensions each year without suffering a tax charge will reduce (to £4000 currently).

Flexible Drawdown

Anyone who had a flexible drawdown plan before 6 April 2015 automatically had their plan renamed flexi-access drawdown on 6 April 2015. This had no effect on how you take benefits but does enable you to make tax-efficient contributions of up to £4,000 each year to money purchase pensions.

Phased Drawdown

Phased Drawdown is where unvested pension funds are used in tranches to provide an income. It is not normally available through occupational schemes.

Phased Drawdown is used to allow a pension holder to gradually cut back on their working hours and replace the associated loss in income by partially crystallising their pension fund. Historically, the preferred method used the Pension Commencement Lump Sum (PCLS) to fund the majority of the required income, this also minimised the amount of funds which needed to be crystallised which had additional advantages in terms of the taxation of death benefits. However, the Taxation of Pensions Act 2014 moved the pivotal point for death benefits from the previous uncrystallised funds versus crystallised funds, to pre and post age 75. As such, the additional tax on death, previously associated with phased retirement no longer applies.

New Death Benefit Rules

You can nominate whoever you choose to receive your death benefits, this can be your spouse, children, grandchildren or even someone unrelated to you, you can also leave some or all of your pension fund to charity.

The beneficiaries of your pension fund can elect to take the fund as a lump sum or leave the fund invested and take an income under the new flexi-access drawdown rules. If they do choose the flexi-access option then they can take income as and when required or leave the funds invested thereby benefitting from the tax advantaged pension.

What about tax on the death benefits?

The tax treatment of your death benefits will depend on two things.

  • Your age when you die.
  • Whether or not the funds are designated to your beneficiary within two years.

If you die before your 75th birthday and your pension funds have been designated to your beneficiaries within two years they will be paid tax-free. If the beneficiaries choose drawdown the funds must be placed in their drawdown pot within 2 years but they do not need to take the money out of the drawdown plan within the two year period.

If you live beyond your 75th birthday or if you die earlier but your pension funds are not designated within the two year period, then the death benefits will be taxed; the taxation that would normally be applied would be at the beneficiaries marginal rate of income tax.

If your beneficiary has not withdrawn the whole of the pension fund before their subsequent death then the pension funds can be passed on again so your beneficiary will be able to nominate anyone they want the funds to go to following their death.

It is possible to have unlimited successors so in essence your pension fund could be passed on for generations if it is not all withdrawn. Each time the fund is passed on, the tax position is based on the age at death of the most recent beneficiary (tax free if they die before 75 and taxed at the beneficiaries’ rates if they die after 75).

Annuities

You will of course still have the option of purchasing an annuity with some or all of your pension fund which for some people may still be the right choice to give a guarantee of an income for life paying a level income or increasing over time.

From 6 April 2015 new flexible annuities also became available which will allow the income level to decrease as well as increase providing this is stated in the annuity when the contract is started.

The new rules are far reaching and far more flexible therefore we would be more than happy to discuss these options with you in more detail so please contact us to arrange a meeting.

The above taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

The value of your investment can fall as well as rise, and you may not get back all of your original investment.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

This article (Your Retirement Options and Pensions Freedom) is intended to provide a general appreciation of the topic and it is not advice.

Article expiry: 05 Apr 2019

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