Trying to formulate a retirement strategy can be a stressful time, and the volume of information out there can be overwhelming. That is why we have put together a list of the most frequently-asked questions that our advisers receive from clients. Can’t see the answer to your question here? Just give us a call to set up a free, face-to-face pension consultation.
What is a pension?
A pension is money paid to you when you reach retirement age – although in some instances, you may continue to work and defer your pension income until later. The aim of a pension is to provide you with some form of income during your retirement years.
What is a pension scheme?
A pension scheme is a savings scheme which offers attractive tax benefits in exchange for you agreeing not to touch the proceeds until you are older. You put your money into a pension scheme, 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 other words the proceeds from your pension scheme are used to provide a pension income when you are older and no longer want or are able to work. A pension scheme is like a savings plan, however you cannot touch the proceeds until you are at least 55 – and at least 75% of the value it achieves may be used to provide an income for the rest of your life.
A pension plan is another term for pension scheme.
Yes, if you plan to enjoy a retirement where you have more income available than that provided by the basic state pension. As the UK population faces increased life expectancy, the basic state pension will provide no more than a safety net.
At current prices (2018/19) the most you can currently get under the basic state pension is £164.35 per week for a single person. How does that compare to your current income? What plans do you have for your retirement and more importantly, how are you going to pay for them?
Annual contribution limits
If you are a UK taxpayer you will be eligible for tax relief on pension contributions. For this year (2018/19) you will get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.
For these purposes, income is defined as your UK derived taxable earnings, including salary, dividends, interest and trading income.
From April 2016 the £40,000 annual allowance will be lowered if you have an income of over £150,000, including pension contributions.
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 as long as you were a member of a pension scheme during those years.
The rules on pensions can change with the seasons, but some basic things have remained constant in recent years:
Investors get income tax relief on their contributions into a pension scheme (up to certain limits).
The income and gains made by that fund roll-up free of additional tax whilst 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 which will be taxable at your marginal income tax rate.
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 2015/16, this value is £1.25 million. This number will drop to £1 million from 6 April 2016.
If your pension fund grows above this value then you will be liable to tax charges on the excess. And 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.
If you have a large pension fund already, for example, if your pension fund is valued at £1.4m and you have 10 years still to go, it might be time to stop making contributions and find somewhere else to put your savings.
Pension schemes are split between those for individuals – personal pensions, including SIPPS and QROPS and those administered by companies on behalf of their employees.
The pensions market is complex and the consequences of a wrong decision could mean you don’t have enough income to enjoy life to the full when you are older. To prepare your retirement you should seek professional pension advice to ensure you make the best possible saving choice for your retirement in Lanarkshire.