Research confirms that far too few investors make enough use of the tax effectiveness of pension plans. For instance, why would a Scottish 41% income taxpayer turn down the chance each year of having their net contribution increased by almost 70% * before being invested in a plan where your profits roll up free of growth taxes, and on death most probably avoid Inheritance Tax? Read on... (*.. For the rest of the UK the numbers in the above example are 40% and 66.7% respectively)
What are the other mistakes to avoid when planning for your retirement?
Here are the 5 key areas we believe that are now crucial to helping you make the correct pension decision. Getting these decisions right for you, even if you have already retired, is exactly what we do.
1. Your current pension contributions – do you know if you are investing too much, too little or, just the right amount?
- Did you know that if you are a Company Director then it is often better for you to pay your pension contributions directly from your business?
- Are you aware that if you are an employee paying pension contributions from after tax income, then you need to make sure you are benefitting from higher and additional rate tax reliefs that might apply?
- A warning for high earners. If you are earning £100,000 a year approximately – then you must make sure that you are not falling foul of the strangely named “Tapered Annual Allowance rules” (Have you even heard of this further layer of complicated rules on your pension contributions?)
- Pension Tax Relief removal/reduction – Are you aware that there is now an almost constant threat each budget statement that higher rate tax relief on your pensions contributions will be removed. But are you also aware that you may be able to catch up on pension contributions that you didn’t make in previous years? But should you? Many investors are completely unaware of how much they can pay. Are you sure you know the rules and limits?
- A warning for Middle earners (£50,000 - £60,000) – are you in danger of losing your Child Benefit? – Are you aware you that paying pension contributions could help remove that risk?
2. Warning for those of you with Large Pension Funds and therefore potentially larger Tax-Free Lump Sums
- Do you understand how the Lifetime Allowance works? Do you need to obtain Fixed or Individual Protection to help offset the effects of the lower Lifetime Allowance? Do you understand the implications of holding Enhanced or Primary Protection? If in any doubt give us a call.
- Are you missing out on a tax-free sum boost? Did you know that it might be possible for you to secure a higher tax-free lump sum when you retire based on the old pension rules? The little-known fact is that, for certain older policies that you may have in your files, the higher tax-free cash rules prior to 2006 still apply. Executive Pensions and Section 32 pension arrangements being the obvious, but not the only, candidates. Why not let us check what you currently have in your pension files to ensure that you don’t miss out?
3. Is transferring your old pension plans to a newer model a good idea?
Many people like the idea of having their pensions all in a “neat new home”. But is this the best thing to do? It might be but please use this three part checklist first.
- Did you know, for example, that old style (mostly pre 1990) Retirement Annuities and Personal Pensions often have much more valuable guaranteed income benefits than new plans and are therefore worthy of keeping?
- Do you want to be worrying about your income and stockmarkerts in your later years when you could possibly have guaranteed an element of your income?
- Warning for those investors in a final salary pension scheme. For those of you with Defined Benefit (Final Salary) Pensions, we are very much in agreement with our regulator, The FCA. Most people will be best served by keeping these arrangements for as long as possible. Of course, there is always an exception to every rule but, in our experience, transferring from a pension such as this is likely only suitable for a very small minority of clients.
4. Are you sure you know how much income you will have in retirement?
- Do you need help in understanding how much income you will need?
- Do you know the best way to have your income structured? (Should you choose regular tax-free payments, a combination of tax free and taxable income or have all your retirement income taxable?)
- Do you have a gap between your private pension retirement age and your State Pension age? If so what are your plans to fill this income gap?
- Should you cash in certain pensions as a lump sum or use other assets first?
5. Are you planning to leave a legacy to your family?
If leaving a legacy to your family is important – when did you last review your pension fund position?
- First, do you know if your pension fund can actually pass on the benefits to your friends/family in a tax efficient manner?
- Are you sure that you have chosen the right people to receive the remainder of your pension fund? This is called making the appropriate nominations.
These are all important issues on their own and we haven’t even touched on how your pension fund is currently invested and whether you are happy with the returns you are enjoying. Or the charges you are incurring.
If you would like a no-obligation initial consultation to review some or all of these crucial issues, then please contact us today by completing our form here or by calling us on 01506 842365.
We are happy to initially discuss things with you on the telephone but you are more than welcome to arrange to pop into the office for an informal chat over a cup of coffee, if you prefer.