This week is #PensionAwarenessWeek, with particular focus on Tuesday, September 15th which is classed as the main Pension Awareness Day.
Here at Lifetime we heartily agree it is a subject that needs raising awareness of!
Pensions can be a complex subject and we understand the importance a pension can play in someone’s life.
- Do you know what sort of pension you have?
- Do you know where your pension is situated?
- Do you know if you can retire early?
- Do you understand the options available to you?
- Do you understand the complexities/features of your current plans?
Worries about retirement provision are a particular concern, with many people unsure of what their pension will provide or when they might be able to retire. This uncertainty also has a direct impact on businesses, with 45% of employers reporting difficulties with regards to succession planning.
We aim to simplify pensions for you and add value to your overall financial planning.
Here are some insights into how a pension can help you.
Are pensions worth it?
In short – yes! One of the main benefits is that, when you pay into a workplace pension or a personal pension, you can get money back from the government in the form of tax relief.
It is a way of encouraging you to prepare for your retirement and it effectively amounts to free money, so it is best to make the most of it.
Should I invest in a pension or an ISA?
The ideal scenario would be to obviously have both if possible and your budget permits. However, while both pensions and ISA are good vehicles for saving, the full picture must be considered to work out what’s best for your circumstances.
Both saving vehicles have a lot of positives and choosing just one could depend on what you are trying to achieve. If you are saving for retirement then undoubtedly a pension is the better option due to the tax breaks.
However, an ISA may be better if you are saving for a medium term goal and or want to access your money sooner than retirement age. In this scenario an ISA would be a good solution that is also tax efficient.
How much can I pay into a pension?
You or your employer can usually pay up to £40,000 every year in to your pension, but there are limits to how much tax relief you can receive.
As highlighted above, a pension is a tax efficient savings scheme. You receive tax relief on your contributions as you pay in to your pension and your savings have the possibility of growing with minimal tax.
The actual amount you can pay in a tax year for tax relief purposes is the greater of:
- A gross contribution of £3,600 or:
- 100% of your earnings, subject to the annual allowance.
The current annual allowance for most people is at £40,000.
Are pensions taxable?
We’ve seen how payments into pensions can get tax relief, but what about money coming out?
Any retirement income over your personal allowance is taxed, just like your wages are when you work. The personal allowance is currently £12,500 but this could change in the future.
However, pension freedoms introduced in 2015 mean people now have much more control over how to manage their pension savings than ever before, and you can take up to 25% of your pot as a tax-free lump sum which you can access from the point you reach the minimum retirement age (currently 55).
What options do I have at retirement?
You now have more choice and flexibility than ever before over how and when you can take money from your defined contribution/personal pension pot. Here are some of the available methods.
- Leave your whole pot untouched
- Guaranteed income (annuity)
- Adjustable income
- Take cash in chunks
- Take your whole pot in one go
- Mix your options
We believe each route requires careful consideration and advice where possible as what you decide now will affect your retirement income for the rest of your life.
When can I take my money?
A great benefit of pension plans is that you can usually start taking money from them from the age of 55 (this will change to age 57 from 2028). This is well before you can receive your State Pension.
Whether you have a defined benefit or defined contribution pension plan, you can usually start taking money from the age of 55. You could use this to help top up your salary if you are still working, to enable you to work fewer hours or to retire early. You may also be able to release a cash sum from your pension too.
There are also some circumstances when you may be able to take money from your pension even earlier than 55, such as if you’re in poor health.
If you need any help at all understanding your pension then please get in touch with our pension and retirement planning experts.