Pension and Retirement Planning
We're here to help
Planning for the future? Wondering what to do with your finances as you approach the end of your working life? You’re not on your own; here at DFP, we’re often asked about pensions and retirement planning.
So, we’ve put together some of our most common FAQs, to help you clarify a few things before you make the decision as to whether you need the help of an Independent Financial Advisor.
1. What is a private pension plan?
A private pension plan is a tax efficient, long term investment for retirement or later life. If you pay into your pension personally, from your ‘after tax income’, you may be entitled to tax relief on your contributions. Likewise, if your company pays in for you, your company may receive Corporation Tax relief.
Quite often, a pension plan can invest in most major assets, such as cash, fixed interest securities, shares, and commercial property.
2. How much can I put into my pension?
The annual allowance, for tax relief purposes, is £40,000. This is the limit on the amount that can be paid into your pension each year, whilst receiving tax relief. Tax relief can be claimed up to your salary, or the annual allowance, whichever is lower. Currently, if you have threshold income of more than £110,000 p.a., and an “adjusted income” of more than £150,000 p.a., your annual allowance is reduced by £1 for every £2 of “adjusted income” over £150,000 p.a. This applies down to a minimum annual allowance of £10,000.
It is also less for those who have already received “flexible benefits” from a money purchase pension, since April 6th 2015. For the 2018/19 tax year, the allowance for these people is called the Money Purchase Annual Allowance, and is £4,000 per annum.
Advice should also be sought if you’ve taken any pension tax free lump sum benefits in the last 12 months and are now looking to continue to make or increase your pension contributions. You are not allowed to “recycle” tax free, cash payments back into a pension plan.
If you have used up your current years’ annual allowance but still want to contribute more, it’s possible to carry forward unused allowances from up to three tax years prior to the current one. You should seek advice if you’re thinking of doing this. You also need to have been a member of a UK registered pension scheme during the year that you wish to carry forward.
There is also a “lifetime allowance”, which is a cap on the amount of tax relieved pension a person is entitled to during their lifetime. This cap currently stands at £1,030,000 for 2018/19 (with excess funds being taxed at up to 55% at the time of taking benefits, or 75 years of age).
Every one of your pensions counts towards the lifetime allowance (excluding your state pension), even if you took the benefits some time ago. Lifetime allowance planning can be complex, so we would always recommend that you seek professional advice.
3. What about tax relief?
Contributions paid by you personally will normally attract tax relief (subject to the annual allowance). This is provided that you have sufficient pensionable earnings to offset. Please note: dividends, interest and rental income are not pensionable.
With personal contributions, 20% tax relief is given to your pension at source, with higher or additional rate relief provided via your Self-Assessment return. It’s important to note that this is because you will have normally already paid tax and NI on the funds in your personal account before they are paid back into the pension.
If you are a Company Director and wish to make payments from your Company, then the Company receives corporation tax relief on the contribution. This is provided that these are “wholly and exclusively” for business purposes, and commensurate with the role that you have.
4. When, and how, can my pension be accessed, and what will I get back?
Private pensions are accessible from the age of 55, rising to 57 from 2028. You can normally take out 25% of your fund, completely tax free, with the rest of the fund being used to provide a taxable income. There are a number of options available for you to receive this income, including:
- Lifetime annuity
- One off lump sum
- A flexible annual amount
- A combination of different options.
The income taken is taxable at your marginal rate of tax. What you get back ultimately depends on factors like how much you save, how your investments perform, and how you choose to take your income.
5. What about my state pension?
The current full state pension – as of the 2018/19 tax year – equates to £164.35 per week. Depending on when you were born, the state pension age ranges between 65 and 68. The actual amount you receive depends on your national insurance record (you need 35 years of national insurance credits to receive a full state pension). State pension forecasts are available here.
6. What happens to my pension if I die?
In the unfortunate event of your passing – if funds are left in your pension plan – the balance can be left to your beneficiaries.
If this happens before the age of 75, said beneficiaries can ordinarily have any remaining money free of all taxes. If it happens after your 75th birthday, there’s no inheritance tax to pay but beneficiaries would have to pay Income Tax on anything that they withdraw, at their own marginal rates of tax.
7. How can Danbro Financial Planning help me?
Danbro Financial Planning provides industry leading, independent advice, with a choice of service options. Our fees are fixed, starting from £750 for investments or pensions related work; so the fee you agree up front is the fee you pay, full stop.
Liam Winstanley is a Chartered Financial Planner and Independent Financial Advisor. He has worked in financial services for well over two decades, specialising in wealth management and financial planning including things like pensions, investments, retirement planning, financial protection and estate plans.
Liam is the Director of Danbro Financial Planning and is passionate about delivering the very highest standards in service, ethics and professionalism within the financial sector.
Away from Danbro, Liam is an avid long-distance runner and also turns out for his local cricket side, Brinscall CC. He lives in Lancashire with his wife and son.