Can you afford to retire?

By 15th February 2019Louise's Column

Making the most of the next chapter in life

Pensions can seem complicated, but the basic idea is a simple one. And increasingly, if appropriate, people are turning to private pensions as a tax-effective way to increase their retirement income. Once you’ve decided to start saving for retirement, you need to choose how you’re going to do it. The precise amount you’ll need to save each month to retire at 55 depends entirely on the kind of lifestyle you plan on having in retirement. If appropriate to your particular situation, there are several different types of private pension to choose from. But, in light of recent government changes, the tax aspects require careful planning.

Different pension schemes
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions.

These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement. Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot.

Pension-related tax relief
A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions. In the 2018/19 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum. If you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Basic rate taxpayers will receive 20% tax relief on pension contributions. Higher rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return. Additional rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return. Non-taxpayers receive basic rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600.

Tapered Annual Allowance
The Annual Allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will, however, be £30,000 – taking the highest earners’ annual allowance down to £10,000.

Overall tax liability
Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.

If you have accessed any of your pensions, you can only pay a maximum of £ 4,000 into any un-accessed pension(s) you have. This is called the ‘Money Purchase Annual Allowance’, or ‘MPAA’. The MPAA applies only if you have accessed one of your pensions.

Access your pension
The lifetime allowance is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge. From 6 April 2018, the lifetime allowance increase to £1,030,000.

What counts towards your lifetime allowance depends on the type of pension you have. We will be able to help you determine how much of your lifetime allowance you have already used up. This is important because exceeding the lifetime allowance will result in a charge of 55% on any lump sum, and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider when you access your pension.

Pension protection addition
If you are concerned about exceeding your lifetime allowance, it may be possible to apply for pension protection. This could enable you to retain a larger lifetime allowance and keep paying into your pension, depending on which form of protection you are eligible for.

In addition to pension protection, if you have reached your lifetime allowance or are close to doing so, it may also be worth considering other tax-efficient vehicles for retirement savings, such as Individual Savings Accounts. In the current tax year, individuals can invest up to £20,000 into an Individual Savings Account.

Savings tax-efficiently
The Lifetime Individual Savings Account, launched in April 2017, is open to UK residents aged 18 to 40 and will enable younger savers to invest up to £4,000 a year tax-efficiently. Any savings you put into the Individual Savings Accounts before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-efficiently.

Finally, it is worth noting that there will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot, as long as the total assets are less than the lifetime allowance. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR
OF FUTURE PERFORMANCE.