Pensions & Retirement Planning
Saving for Retirement
Whilst all employers are now required to provide access to a workplace pension scheme for eligible employees, a significant proportion of the nation’s workforce is now self‑employed or working on a contract basis.
For the self‑employed and contractors the necessity to provide for retirement falls to the individual, but the good news is that pensions still offer substantial tax breaks especially for higher and additional rate tax payers.
Whilst there may always be other demands on your finances, delaying your retirement provision will likely increase the amount you will need to contribute in later life to achieve the same income in retirement. Starting early gives you more time to contribute, more time to benefit from tax relief, and more time for your pension investment to grow. The longer you postpone saving, the more you may have to save.
Whilst most will benefit from the Basic State Pension, this will barely provide enough for basic comforts. To have the retirement many aspire to (with for example holidays, running a car, entertainment or home improvements), will require additional income, savings or capital.
How does tax relief on pension contributions work?
Tax relief is available on your UK relevant earnings (self-employed earnings or PAYE if a contractor) up to the Annual Allowance of £40,000 a year. Relevant earnings exclude rental, pension and dividend income.
Tax relief means for a basic-rate taxpayer, for every £100 you pay into your pension, the government will add an extra £25. So your pension pot will be credited with £125.
If you are a higher rate taxpayer in England, Wales or Northern Ireland you can claim back a further £25 for every £100 you pay in through your tax return. In Scotland, the higher rate of tax is 41% so you can claim back a further £26.25.
So in effect, a £125 contribution to a pension for your retirement will cost £75 for a higher rate tax payer in England, Wales or Northern Ireland. This is based on the £100 net contribution, less the £25 claimed back via your self assessment.
Accessing Pension Benefits
The traditional way to access your pension benefits was by purchasing an annuity. This involved exchanging your pension pot for a guaranteed income for life. Whilst annuities provide certainty of income, due to increasing longevity and low interest and annuity rates, annuities are now perceived to be very expensive.
Pension freedoms introduced in the 2015/2016 tax year have also driven the popularity of alternative strategies, with many people now opting to keep their pension invested, and draw an income as and when required (called Flexi Access Drawdown).
As pensions are written under trust, they do not form part of your estate for inheritance tax purposes. Consequently for those with large estates and other assets to draw upon, preserving the pension for future generations may be desirable.
We can guide you through the options to ensure you get the best fit for your needs and objectives. To arrange your fee free initial consultation, please get in touch using the links below.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.