Getting Financial advice about your retirement options
It is important to choose the right options at retirement to receive the best outcome from your pension savings or investments. However, many people may have low levels of engagement and knowledge about their pension and savings, this is where independent advice on pensions and retirement options from Iain Longworth Partnership can help.
We appreciate people choose to retire at different ages including those that retire in difficult circumstances such as ill health and those who plan their retirement early on in their career.
You have new pension freedoms
We’ve set out the main changes to your pension and retirement options and what they mean for you now the new rules are in place that came into force on 6th April 2015. These will become important to you both before and when you come to retire. The effect these changes have on you and pension tax rules in general will obviously depend on your individual circumstances. We are mindful that any pension advice we give will take into account the fact that just as these rules have now changed, they can change again in future so you will need the correct financial advice taking this into account any financial planning that you make.
There’s an upper limit to how much your employer can contribute to your pension each year and receive tax relief for the contributions made. The contributions are called the annual allowance. The annual allowance this year is either 100% of your earnings or £40,000 whichever is lower.
You will still have an allowance if you’re not currently paying tax or receiving earnings, this can be up to £3,600 per year. If you go over this limit, you’ll be charged tax. You can carry forward any pension allowances unused from the last 3 years. You can in this circumstance pay in more without being taxed.
There is also a Lifetime Allowance (LTA), which is the maximum you can have in all your pensions without paying any extra tax. From 6th April 2015 the Lifetime Allowance is £1.25m. In the 2015 Budget it was announced that the Lifetime Allowance will reduce to £1m from April 2016. This will then be index linked (CPI) from April 2018.
Until recently announced you could take some of your pension pot as cash, not all of it unless the total of all your pensions was less than £30,000. Before these changes, you could withdraw up to 25% tax free but you would need to use the rest of the pot to buy an annuity or to set up income drawdown where your money remains invested in something and you draw an income from the money.
Now the rules have changed for pensions, it means that you can take as much of your pension pot in cash as you want to. The first 25% of the pension pot that you take will still be tax free, but the remainder of the pot that you take will be taxed on as income. We refer to this as an Uncrystallised Funds Pension Lump Sum (UFPLS) which means you have the ability to take out as much money as you want when you need it.
The tax on the taxable 75% of the pot could, however, be expensive for you. This is depending on how much you take and how much other taxable income you have in the tax year. This could push you into the higher rate tax bracket and cause you to loose your income tax personal allowance (where taxable income for the year exceeds £100,000). It could also push some of the pot into the additional rate bracket (currently 45%, where taxable income for the year exceeds £150,000). So sound financial planning advice will be needed.
If you wanted to take some money out but leave the rest in to give you an income, you can use Flexi Access Drawdown (FAD). Under the Flexi Access Drawdown rules you can take out up to 25% tax free the rest you would leave in the pot to give you an income. This will be taxable when you take it.
The age at which you can start using your pension is 55 but this is set to rise to age 57 by 2028.
Once you have retired and if you’re already using flexible drawdown to draw an income, you will have been automatically switched over to FAD on 6 April 2015.
If you decide to use FAD (draw an amount above 25% from your pension) or take an Uncrystallised Funds Pension Lump Sum (which means draw out all of your pensions savings, paying tax on all amounts above 25%) you will not have the Annual Allowance any more to make future contributions to your pensions. you will have a Money Purchase Annual Allowance (MPAA) of only £10,000 per year and there is no option to carry forward.
There were previously a 55% tax chargeable on pension funds when you died, where benefits were paid as a lump sum.
Now any pension funds that are inherited from a pension holder who dies before age 75 will not be taxed. A pension that is passed on after age 75 will either be taxed at the beneficiary’s income tax rate if taken as an income or at 45% if taken as a lump sum (this is expected to reduce to the beneficiary’s marginal rate from April 2016).
If you’re thinking about withdrawing from your pension, it’s important to think about the immediate tax consequences for you, as well as how you’ll fund your retirement in the long term. This is why it is important to take the correct financial advice from Iain Longworth Partnership.
During your pension advice session learn about
- About Personal Pensions
- Stakeholder Pensions
- Self Invested Personal Pensions (SIPPS)
- Investing Your Pension Fund
- Different Levels of Risk