This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM.
Pensions have many huge advantages that make them a powerful component of retirement planning. Not only are there opportunities to boost the size of your pension pot using tax relief, but in 2019-20 your defined contribution pension(s) is also not counted as part of your estate for inheritance tax purposes (allowing you to pass the money on tax-free).
Pensions also offer the opportunity to grow your investments, largely free of tax. Since 2015, moreover, you are also allowed to start withdrawing money from your defined contribution pension(s) from the age of 55 (although this minimum age is likely to increase shortly). You can also take up to 25% as a tax-free lump sum.
Yet with all of these compelling advantages to pensions, there is also a lot of confusion. How exactly do you save efficiently into a pension from a tax perspective, and how do you ensure you take full advantage of the benefits available to you? Here at WMM, our financial planning team has considerable experience helping clients across Oxfordshire to answer these exact questions.
In this short guide, we’ll be offering three areas of pension planning to consider with your adviser. We hope you find this content helpful and invite you to get in touch to arrange a free consultation, to discuss your own pension or retirement plan with us.
Reach us via: 01869 331469
Leveraging the annual allowance
The UK government places a cap on how much you can save into a pension each year (since it spends considerable sums on tax relief). In 2019-20, you can commit up to £40,000 per tax year into your pension(s) or up to 100% of your salary – whichever is lower.
It’s important to bear this rule in mind when planning to save for retirement. Usually, it’s better to try and spread your savings out somewhat throughout your career, rather than planning on making some large lump-sum contributions towards the end of your working life.
For instance, some people imagine selling a second home and committing the proceeds to their pension. If you sold a house for £300,000, however, then you would be unable to put all of the money into your pensions within a single tax year. In such a scenario, you might, therefore, within a tax year commit some of the money to your ISA(s) for easy-access savings, some of it to your pension and the rest to an investment portfolio. However, others might need to take a different course of action in light of their own personal circumstances and financial goals.
Taking advantage of tax relief
The UK government offers tax relief to British residents as a “reward” for saving towards their future, via a pension. In 2019-20, a Basic Rate taxpayer gets 20% tax relief whilst a Higher Rate taxpayer gets 40%. In effect, the former can commit £100 of their salary to their pension each month, yet it only “costs” them £80. The latter can contribute the same amount for £60, and for Additional Rate taxpayers it only costs them £55.
This extends to your pension contributions automatically as an employee under auto-enrolment, via the PAYE (Pay-As-You-Earn) system. Essentially, what happens is the government puts the money it would have collected in taxes on your contributions into your pension pot.
This system, clearly, has great potential to grow your investments more than if you’d simply put your capital into a Stocks & Shares ISA. It can also provide opportunities for Higher Rate taxpayers to reduce their immediate tax bill whilst building up their future nest egg. For instance, suppose your salary is £55,000 in 2019-20 which means £5,000 is potentially liable to 40% income tax. By putting this money straight into your pension instead, you could conceivably avoid this tax band altogether and get £2,000 tax relief from the government!
Maximising the State Pension
Another important area of retirement planning to consider is the State Pension. In 2019-20, the full new State Pension stands at £168.60 per week (i.e. about £8,767.20 per year). To receive this you must have accrued at least 35 years of qualifying National Insurance Contributions (NICs), and you need to have a minimum of 10 years NICs to get anything at all.
This is particularly important to think about if there is a chance you might take breaks from your career (perhaps to raise children), which could result in you not achieving the full 35 years needed to get the best State Pension deal. It’s certainly a powerful income stream to have within your retirement plan, since the payments are protected against inflation by a “triple lock” and (unless the system changes in the future) the income is guaranteed for the rest of your life.
If you think you might not be on course for a complete National Insurance record, then there are options which you can discuss with your financial adviser. One idea might be to delay retirement for one or more years, to allow time to reach the 35 qualifying years of NICs you need. Another option might be to make voluntary NICs, to “top up” incomplete year of NICs over the past 7 years.
Invitation
If you are interested in starting a conversation about your financial plan or retirement strategy, then we’d love to hear from you. Get in touch today to arrange a free consultation with a member of our friendly team here at WMM.
Reach us via: 01869 331469
