Retirement and Pensions Planning
Working out your likely financial position at retirement can be a bit of a minefield. You may have accumulated several different pension arrangements over the years, or be just starting your pensions planning and wondering which is the best route to take. Whatever your personal circumstances, you want peace of mind that you’ll be able to enjoy your desired lifestyle when you retire and perhaps also continue to help support your children and grandchildren.
The Government's radical Pensions Freedom announcements during 2014, have created considerable flexibility for those people approaching, or over age 55, in 2015. The option to draw upon pension funds, in part or in full, will create some fantastic planning options to help people meet their objectives.The ability for the "cascading of wealth" down the generations is also highly attractive to many comfortable retirees.We expect that clients' annual Reviews will become more concerned with Tax-planning, as clients look to meet their ongoing income requirements.
These days, usually the ultimate investment choice and flexibility is provided by Self Invested Pension Plans (SIPPs) but pension plans are not the only way to save for retirement. Here we consider a number of different options.
Wolverhampton: Impartial Investment Advice
John, a retired Accountant from the Midlands, and Jean had been regularly visited by an Equitable Life salesman, and had invested all their money (>£1 million) with this insurance company. When Equitable Life’s guaranteed annuity rate liabilities caused them to effectively collapse, John and Jean were left high and dry and urgently needed some impartial investment advice.
Their accountant asked if we could help, and we rearranged their finances and analysed each option in respect of their Equitable exposure, taking taxation, disinvestment penalties and the alternatives into account, before suggesting an action plan that was then executed in stages over the next few years.
Their portfolio is now in rude health, and we regularly review the portfolio performance, and any income or capital requirements.
NB. Whilst the Client names have been changed for Client privacy purposes, these case studies are actual ASPL Client case studies.
For those wanting greater control of their pension, then a SIPP is likely to be appropriate for you. SIPPs earn tax relief in the same way as normal pension funds, and usually one quarter of the value of the fund can be taken as tax-free cash from the age of 55.
SIPPs for example can invest in Bank Deposits, Bonds, Shares, Unit Investment Trusts, Open Ended Investment Companies, Exchange Traded Funds, Commercial Property, Hedge Funds, etc. These days, when you retire, you are not obliged to either buy an annuity or switch into an Income Drawdown Plan, and you can use your SIPP to manage your retirement income.
For those with pensions already in payment of a certain amount, you may be able to draw upon your entire pension fund by a single or more regular withdrawal and exhaust the entire fund. Please speak to us if this option is likely to be of interest to you.
For those who may require a more straightforward choice, you may wish to look at Stakeholder pensions or NEST.
You may also be interested in our section on Using your pension fund to buy premises
Stakeholder pensions are like a personal pension but have to meet certain minimum standards to ensure that they are value for money. The Annual Management Charges are limited to 1.5% per annum for the first 10 years (and thereafter up to 1%). Like a SIPP, you can start, stop, re-start or change your contributions whenever you want, without penalty.
You get tax relief on contributions of up to 100% of your earnings each year, subject to a maximum of, currently, £40,000 for the 2014/15 tax year. Your employer may already offer you access to a Stakeholder pension scheme through the workplace. We sometimes use Stakeholder pensions for setting up children’s pensions (typically with contribution by parent or grandparent).
The National Employment Savings Trust was introduced in the UK in October 2012.
The Government estimates that about 7 million people are currently under-saving for retirement and a major part of the Government’s pension reform ideas is to make it easier for these people to save for retirement.
UK employers are required to automatically enrol employees into a “Qualifying Workplace Pension Scheme”. This auto-enrolment could be to your existing company pension scheme if it meets certain criteria, otherwise the employees will be enrolled into NEST, which aims to be a simple, low-cost pension scheme being introduced by the Government.
Between October 2012 and 2017, depending on the size of company, all UK employers will be required to contribute a minimum of 3% of each employee’s eligible earnings into a pension, assuming the employee does not “opt out”. Employees will need to pay a personal contribution of 4% with a further 1% tax-relief being added, to make the minimum contribution 8%.
Therefore NEST will become the “default” option for employees going forward.
These vary from company to company and are typically either: “salary related”( Final Salary or Defined Benefit) – whereby the amount of pension you get is based upon your salary, the number of years you have been in the scheme, and the “accrual rate” (e.g. one sixtieth), or "investment related" (Money Purchase schemes or Defined contribution).
A Money Purchase Scheme is based on how much has been paid into your scheme and the investment performance of that money.
Your employer may give you the option of diverting any employer contributions into your own personal arrangement, e.g. SIPPs or Stakeholder pensions.
We offer a company/occupational pension scheme Review service, with a view to assessing the benefit or otherwise of leaving your pension scheme where it is or transferring elsewhere.
Your old, frozen and current pension funds may be used to acquire commercial property. The idea is that the property ownership can be split between you personally and/or your business, and/or your pension funds. This therefore gives you a route to enable the purchase of the commercial premises you perhaps thought you could not afford. We could help you structure the deal so that your company ends up paying rent into your own pension fund. This is of course a complex area so please contact us for advice.
Yes, this has been possible for some years now. The maximum amount you can invest is £2,808 per year (which the Government tops up to £3,600 with basic rate tax relief).
It certainly is an excellent idea to start a child early on a pension scheme, as this typically means they will have a 20, possibly 30 year head start on most of us. Please note however that this is of course a long-term investment as the funds cannot be touched by the child until they reach the minimum age of 55 under current legislation.
You are able to pay a one-off contribution or regular contributions up to £2,808 net per tax year (2014/15).
SIPPs or Stakeholder pensions can be used for this purpose. Parents, grandparents and other relatives can contribute.
You don’t need to invest in a pension to save for your retirement. There are a number of tax-efficient alternatives available now that the (Stocks & Shares) New ISA or "NISA" allowances have increased (to £15,000 per person during 2014/15 or £30,000 per couple, per annum) an NISA investment strategy should be considered. Once NISAs are maximised, you should consider your Capital Gains Tax strategy as there is an annual exempt amount (for 2014/15) of £11,000. Thereafter, this tax-free annual allowance and individual’s net gains are taxed at 18% for basic rate tax-payers and 28% for higher rate earners. This currently compares very favourably with income tax rates and so must also be considered as part of a retirement planning strategy.
Thereafter, there are National Savings, depending on the rates on offer from time to time and their availability, and then there are also higher risk tax-efficient investment such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS), but these are not for everyone.