“Aren’t pensions complicated?”
A question I often hear, indeed, sometimes it is said as a statement. This appears to be the view shared by the chief economist of the Bank of England no less, who has been quoted as saying, “I confess to not being able to make the remotest sense of pensions”.
For most of us though the recent changes have only really brought increased flexibility, which can only be a good thing, allowing a more tailored approach to be taken. With greater choice well informed decisions are needed to ensure the best outcome for you. This is where professional advice can be of critical importance.
The Saving Power Of Pensions
Pensions offer, arguably, the most tax advantageous savings regime available and should not be dismissed but taken advantage of. It is because the tax advantages are so generous that the amount you can put in and accrue in pensions is restricted (£40,000 per annum and £1M overall respectively – unless you are already taking a pension income when the “annual [input] allowance” is reduced to £10,000).
With tax relief on contributions still available at your highest marginal rate, tax free growth, a quarter of the accrued fund available tax free (sometimes more in certain circumstances) and being free from inheritance tax, it isn’t difficult to see why pensions are becoming increasingly attractive.
Some pension funds are now effectively “inheritable” and can form part of your inheritance and estate planning, assuming your current plans offer this flexibility. Consequently, it would prudent to check your current plans if you have not reviewed them since the introduction of the “pension freedoms” introduced in April of last year, particularly in respect of the nominated beneficiaries in the event of death.
Pensions & The Proposed “LISA”
For those aged between 18 and 40 years of age the proposed Lifetime Individual Savings Account (LISA), which include as 25% government bonus on eligible contributions up to £4,000 per year, offers further tax advantageous opportunities. However, where the provision of retirement benefits is the objective I would suggest pensions are still the favoured option where an employer is also contributing.
The real challenge is to ensure you have a pension pot of sufficient size (and indeed other complementary non-pension pots) to retire when you want to and to support the lifestyle you seek – without running out of money later on. There are a number of approaches which can be adopted to achieve this, and indeed combinations of approaches. Hybrid solutions incorporating a level of secured income and a degree of flexible access are now becoming available from various providers. An independent, non-restricted, adviser should be consulted to ensure all options are explored.
In summary, don’t be put off – take control – ask for help – make informed decisions and enjoy a secure retirement
This content is for general information only and is not intended to be advice to any specific person. As with all tax planning, you are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this article. This publication represents our understanding of law and HMRC practice.
Author: Paul Newton, a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022.
