Retirement Planning

We have discussed some of the types of pension savings vehicles that can be used during the accumulation phase under the Pension Services section of this website. We have also explained the benefits of the tax relief you can receive from your pension plan.

The retirement planning accumulation phase is simply building up a pot of money to help you financially when you reach your planned retirement age. By building up your own fund you can use this to supplement any State Pension who may be eligible to receive, and basically taking your own retirement plans into your own hands.

There’s a limit to how much you, your employer and anyone else can contribute to your pension each tax year and receive tax relief. It’s called the Annual Allowance. This year it’s either 100% of your earnings or £40,000, whichever is lower.

You still have an allowance if you’re not currently paying tax or receiving earnings, of up to £3,600 per year (and this applies across the board, so that for instance you can pay £2,880 into a pension for a minor child, and the government will top it up to the £3,600). If you go over the limit, you’ll be taxed. It is possible to “carry forward” unused pension allowances from the last 3 years, and in this way (so long as it is within the above limit for the current year) you can pay in more without being taxed.

There’s also the Lifetime Allowance (LTA), which is the maximum you can have in all your pensions without paying extra tax.

So anyone can start saving for retirement, just don’t put it off. Take action and start planning for the longest holiday you will likely ever have.

The new Pension Freedom rules mean if you are approaching retirement you should really seek independent financial advice and ensure that you know all of the options and possible opportunities and pitfalls that these new rules bring.

Until recently you could take some of your pension pot as cash, but not all of it, unless the total of all your pensions was less than £30,000.  Before the changes, you could withdraw up to 25% tax-free but you’d need to use the rest to buy an annuity or to set up “income drawdown”, where your money remains invested and you draw an income from it.

Now you can take as much of your pension pot in cash as you want to. The first 25% of what you take will still be tax-free, but the remainder of what you take will be taxed as income. You may hear this called an Uncrystallised Funds Pension Lump Sum (UFPLS) – it just means you have the flexibility to take out as much money as you want when you want it.

The tax consequences for the taxable 75% could, however, be expensive for you, as, depending on how much you take and how much other taxable income you have in the tax year, it could push you into the higher-rate tax bracket, and/or cause you to forfeit your income tax personal allowance (where taxable income for the year exceeds £100,000).  It could also push some of it into the additional rate bracket (currently 45%, where taxable income for the year exceeds £150,000). So judicious planning will be needed.

If, alternatively, you want to take some money out but leave the rest in to give you an income, you can use Flexi-Access Drawdown (FAD). Under FAD, you can take out up to 25% entirely tax-free and leave the rest in the pot to give you an income, which will be taxable when you take it, whenever you want for as much as you like. You no longer need to have a minimum guaranteed income to use drawdown.

Finally, the age at which you can start using your pension is still 55 but its set to rise to 57 by 2028.  Goldstone Wealth are very happy to discuss all your options with you so please get in touch.

So you have reached retirement and maybe already are in drawdown or still just considering your options around your undrawn pension plans.

Once you’ve retired, if you’re already using flexible drawdown to draw an income, you’ll have been automatically switched over to FAD on 6 April 2015. If you’re using capped drawdown – where the amount you can take each year is limited – you can choose to move it to FAD.

If you decide to use FAD (draw an amount above 25% from your pension) or take an Uncrystallised Funds Pension Lump Sum (which means draw out all of your pensions savings, paying tax on all amounts above 25%) you won’t have the Annual Allowance any more to make future contributions to pensions. Instead, you’ll have a Money Purchase Annual Allowance (MPAA) of only £10,000 per year. Unlike the Annual Allowance there’s no option to carry forward.

Previously there was a 55% tax charge on pension funds when you died, where benefits were paid as a lump sum.

Now, pension funds inherited from a pension holder who dies before age 75 will not be taxed.  A pension passed on after age 75 will either be taxed at the beneficiary’s income tax rate if taken as an income or at 45% if taken as a lump sum (this is expected to reduce to the beneficiary’s marginal rate from April 2016).