Retirement planning may most often take two forms:
Those in the ‘accumulation‘ phase – saving for retirement, and then those in the ‘decumulation’ phase – turning their funds into a retirement income.
We can help you plan both stages, and our robust retirement planning advice may be right for you.
At their most basic, a pension is simply a savings scheme that offers very attractive tax benefits in exchange for you agreeing not to touch the proceeds until you are older. In other words, you put your money in, that money is invested, its value (hopefully) grows and at the end, you withdraw the proceeds and use it to pay for goods and services.
In this case, however, you cannot touch the proceeds until you are at least 55 – and at least 75% of the value it achieves must be used to provide an income for the rest of your life.
The rules on pensions can change with the seasons, but some basic elements have remained constant in recent years:
- Investors recieve income tax relief on their contributions into a pension scheme (up to certain limits – see below);
- The income and gains made by that fund accumulate free of additional tax while the money remains invested;
- At retirement, you can take a tax-free lump sum of up to 25% of the total fund value;
- The remainder of the fund is then used to provide an income that will be taxable at your marginal rate of income tax.
The things that have changed, however, are the contribution limits, the age at which you can retire and, to an extent, the tax relief you can receive on the contributions you make. However, now the previous Government’s changes have been implemented and the Coalition Government’s intentions have been clarified, there is a little more certainty, at least for the time being.
Annual contribution limits
This tax year (2013/14), the maximum amount you can invest into your pension, personal or occupational, is 100% of your income or £50,000, whichever is the lower. For these purposes, income is defined as your UK-derived taxable earnings, including salary, dividends, interest and trading income. You will receive tax relief on the entire investment, up to that limit. However, if you try to invest more than £50,000, you will have to pay tax at 40% on the excess. This limit, incidentally, applies to the combination of both employee and, if applicable, your employer’s contributions. You can, however, carry forward up to three years unused allowance to subsequent tax years.
Note: The Government recently announced that the annual allowance will reduce from £50,000 to £40,000 for Pension Input Periods ending on or after 6 April 2014, so care should be taken if making a large contribution after 6 April 2013.
The lifetime allowance applies to the total value of all private and work pensions (not state pensions) that you build up over your lifetime, including the investment growth you achieve. For 2013/14, this value is £1.5m. If your pension fund grows above this value, you will be liable to tax charges on the excess. These charges are quite onerous – 55% if the amount over the lifetime allowance is paid back to you as a lump sum and 25% if the amount over the lifetime allowance is taken as some form of income.
Therefore, if you have a large pension fund already, even if it has not yet reached the lifetime allowance, you have to consider whether there could still be some investment growth to come. For example, if your pension fund is valued at £1.2m and you have 10 years still to go, it might be time to stop contributing and find another home for your savings.
Please download our planning for retirement guide* which you can print and read at your leisure.
Alternatively, if you require independent financial advice on retirement income options, feel free to call on 01554 770022 and we can arrange a no obligation appointment.
*Brochure provided courtesy of http://www.adviser-hub.co.uk