Have you started your pension? When it comes to planning how you’ll fund retirement, the sooner you get started the better, as Julie Bloodworth, Partner at Rawlinsons explains
Many of us can remember the day we left school or university to begin our working life. Yet today you may be closer to retirement than the day you started your first job. You may feel your pension isn’t that important. Indeed, many people don’t start to properly consider their retirement income until they are in their fifties, by which time it can be too late.
The age at which you start receiving the State Pension is increasing and even then it will only provide a small income. Meanwhile falling interest rates have led to reductions in annuity rates. In January 1997 a pension fund of £100,000 would have bought a man aged 65 an annuity of more than £11,000. Today, that annuity could have fallen to less than £6,000. The exact amount is dependent on state of health and type of annuity selected.
Life expectancy continues to rise, so whatever pension provision you have needs to last longer. The sooner you start to make pension contributions the better.
Types of pension
Schemes from which an individual may eventually be in receipt of a pension include a workplace or personal pension scheme. A workplace pension scheme may either be a defined benefit scheme or a money purchase scheme. A defined benefit scheme pays a retirement income related to the amount of your earnings, while a money purchase scheme reflects the amount invested and the underlying investment fund performance. Due to auto-enrolment legislation all employers either do or shortly will have to provide a workplace scheme. These are likely to be money purchase schemes.
A personal pension scheme is a privately funded pension plan. This can also be funded by an employer. These are also money purchase schemes that the self-employed can invest in.
To benefit from tax privileges all pension schemes must be registered with HMRC.
A money purchase scheme allows the member to obtain tax relief on contributions into the scheme and tax-free growth of the fund. If an employer contributes into the scheme on behalf of an employee there is, generally, no tax charge on the member and the employer will obtain a deduction from their taxable profits. There is a lifetime limit, currently £1m, which is the maximum amount of tax-relieved savings in the fund(s).
There is also an annual allowance, currently £40,000. This sets the maximum amount that can be invested with tax relief into a pension fund. It applies to the combined contributions of an employee and employer. Amounts in excess of this allowance trigger a charge. There are restrictions to the annual allowance where pension benefits have already been drawn but there is an ability to carry forward unused allowances up to three years in certain circumstances.
Personal contributions are payable net of basic rate tax relief, leaving the provider to claim the tax back from HMRC. Higher and additional rate relief is given as a reduction in the taxpayer’s tax bill. Employer contributions are payable gross direct to the pension provider. Employees paying into a workplace pension receive tax relief though PAYE.
An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year. Tax relief will generally be restricted for contributions in excess of the annual allowance.
Drawing a pension
Under current legislation individuals are free to draw on their pension from age 55, including taking a tax free lump sum of up to 25% of the fund.
Your pension pot is separate from the rest of your estate and can be used as an effective inheritance tax planning vehicle.
This is a general overview of current legislation and should not be relied on to make decisions regarding pension provision. Individuals should always take advice specific to their circumstances. Please contact Rawlinsons for more detailed advice.
Rawlinsons Chartered Accountants: 01733 568321, www.rawlinsons.co.uk
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