Think about your Pension
April’s Pension Reform opened up more opportunities at retirement for those with defined contribution pension plans. But does this make the plans more attractive?
WHY SAVE FOR RETIREMENT?
According to a recent survey (1) workers want around half their current income to be comfortable in retirement. However, two fifths claim they have no retirement plan and only one fifth claim to have one which is “well developed”.
This lack of planning is backed up by figures from the ABI suggesting the average annuity purchase in 2014 was around £34,000 – equivalent to an income of about £1,700 a year (2) . Is this enough (even when added to the State Pension) to achieve the retirement lifestyle you seek?
This ‘gap’ has been recognised by the Government. Auto enrolment is now becoming mandatory for all employers and unless you actively opt out, some of your salary will go into a pension. That contribution will then be matched by a combination of your employer and the Government (through tax relief).
There are limits to the amount your employer has to contribute – but you don’t have to limit yourself. You can place up to 100% of your salary into a pension each year (subject to a maximum contributions total, including employer contributions of £40,000) and get tax relief. For a basic rate taxpayer, that means an additional £20 for every £80 invested; more if you pay higher rate tax.
TAKING YOUR INCOME
Until April, you were limited in how you could turn your fund into income. Now, you are no longer tied to buying an annuity or putting your money in an investment plan. You have control of deciding how much you need, when you need it and what you spend it on, or leaving it untouched.
In terms of tax, as before, you can take up to 25% of that pension fund value tax free. After that, withdrawals are taxed as income at your marginal rate in the tax year that withdrawal is received.
This could make pensions more attractive as a savings vehicle for retirement. The priority is to target an income you are comfortable with – but why stop there? Why not contribute more (3) – for a new car or a luxury holiday? After all, there are some things in life that need the freedom of retirement for you to truly enjoy; and pensions might now be a way to help make that happen.
(1) Aegon Retirement Ready Survey 2014
(2) ABI Retirement Income Statistics, update as at end Q4 2014 combined with William Burrows History of Annuity rates chart
(3) Pension funding is subject to a maximum lifetime allowance, currently £1.25m in 2015/16 and falling to £1m in 2016/17; otherwise tax penalties may apply