Pensions

Starting a Pension:
If you want to enjoy your retirement, instead of spending your time worrying how you are going to pay the heating bills, you need to have money to live on… and a state pension won’t be enough at.
Currently the Basic State Pension is £102/week = £442/Month from which youwill still need to pay council tax, utility bills, house insurance, car insurance, petrol & going out to name the main items.

Even adding a little extra to the basic state pension will make a big difference and the earlier you start and the more you save the easier your retirement will be.

Whilst the traditional ages for the State Pension Age (SPA) were 60 for women and 65 for men. The currently projected changes are as below:
Between 2010 and 2020 women’s retirement ages are increasing to 65
Women born before April 6 1950 will reach SPA at 60
Women born after April 6 1955 will reach SPA at 65
between these dates there is a sliding scale based on individual birth dates

New State Pension Ages for All
Born April 1955 to April 1959 – Age 65
Born April 1959 to April 1968 – Age 66
Born April 1968 to April 1977 – Age 67
Born after April 1977 – Age 68

Why is making a start important?
Based on an average of 7% growth to age 65, 1% Annual Management Charge,  5.5% annuity rates & saving £100/Mth gross (£80/mth net), without index linking in retirement and not taking inflation into account:

A 20 year old would have an additional income of approximately £14,230
A 30 year old would have an additional income of approximately £7,490
A 40 year old would have an additional income of approximately £3,704
A 50 year old would have an additional income of approximately £1,577

Obviously therefore, the sooner you make the decision to start taking pension contributions seriously the greater your income in retirement will be.

Why is where I  am invested important?:
Reviewing your pension is as important as starting a pension, you, along with a financial advisor should regularly review your pension plans (& investments) to ensure that they continue to be appropriately invested in a changing market place.
The importance of fund performance is shown below:

£10,000 invested for 30 years at 3% avg growth – expected approximate return £18,000
£10,000 invested for 30 years at 4% avg growth – expected approximate return £24,000
£10,000 invested for 30 years at 5% avg growth – expected approximate return £32,000
£10,000 invested for 30 years at 6% avg growth – expected approximate return £42,600
£10,000 invested for 30 years at 7% avg growth – expected approximate return £56,400
£10,000 invested for 30 years at 8% avg growth – expected approximate return £74,600
£10,000 invested for 30 years at 9% avg growth – expected approximate return £98,400

Your pension provider will most likely write to you each year and tell you what your pension would achieve at age 65, if average growth achieved was  5%, 7% or 9%. Most people will then assume that they will be somewhere in the middle of this and according to the above example would assume their fund would be worth £56,400 at 7% growth.
Your provider will probably not tell you what the fund that you are invested in has actually achieved over the short, medium and long term and if it has only achieved 3% over a long term and likely to carry on at that level then your fund may only be valued at £18,000 at age 65, according to the above example, which might be a shock.
Neither will your pension provider likely tell you how the fund you are invested in compares to other funds available of the same nature or what investment choices & comparisons are available to you.

What do I do when I want to retire?
How do I buy and annuity (income for life)?
When you want to retire you will need to decide whether to purchase an annuity and whether to purchase your annuity from your own pension provider or whether another provider will offer you a larger income instead of who you built up your fund with (this is called your Open Market Option)
We will make a whole of market comparison for you of all the annuities available and tell you who will offer the best rate.
You may have several small pension pots and find that one provider will offer you a higher rate to take them all together as one.

What if I dont want to buy an annuity?
Alternatively you may decide to leave your funds invested and take income withdrawals from your fund, the later you purchase an annuity the more the annuity is likely to pay because the older you are the less time the annuity provider expects to have to pay an income from the fund – this may also allow some of the funds to be passed to your dependants on your death in contrast to purchasing an annuity, however the investment risk will stay with you rather than being passed to the annuity provider.

• Under the new Drawdown Pension, the maximum drawdown limit will be 100% of the lifetime annuity that could be purchased based on GAD rates (previously 120% on Income Drawdown and 90% on ASPs).
• Income from the new Drawdown Pension will be reviewed every three years until age 75 and annually thereafter (previously five years for Income Drawdown and annually for ASPs).
• There are transitional rules for those in Income Drawdown or ASPs before 6 April 2011.
• ‘Flexible Drawdown’ will be available to those in receipt of relevant income of £20,000 pa.  There will be no limit on the amount of the Flexible Drawdown pension and it will not be necessary to carry out annual or triennial reviews.
• It will be possible to draw tax-free lump sums after age 75.
• Contributions to pension plans will still be possible after age 75 but will not attract tax relief.
• Serious ill health lump sums may be payable after age 75, but will attract a 55% tax charge.  Payments made before age 75 will still be tax-free.
• Trivial and winding up lump sums may be payable after age 75.
• Charity lump sum death benefits may be paid after age 75.
• The special lump sum death benefit charge will increase from 35% to 55% and will apply to lump sums paid from uncrystalised funds payable on death on or after age 75 and on crystalised benefits (irrespective of age).A third way is also developing where variable annuities can give certain guarantees in income and/or fund values but the death benefits pay out in the same way as unsecured fund withdrawal.

A financial advisor can explain all of the options available to you, so you can make decisions that you are less likely to regret later.

What about putting a property into my pension?
Sipps/Sass’s and Commercial Property Purchase are covered under the Business Advice Section.

Pensions and divorce
Often a pension fund can be worth more that the value of your house and therefore is a very important part of any financial discussion on divorce.
You will need to get professional advice about your pension (or your spouse’s pension) when you divorce. A pension is treated as an asset – and pension sharing allows a pension fund to be divided and transferred from one spouse to another as a final settlement achieving a clean break

Annual Allowance
£50,000 Annual Allowance Limit
• An allowance of tax free contributions of £50,000 per tax year will apply to everyone irrespective of their earnings.  Previously the limit was the lower of earnings or £255,000.
• Annual Allowance applies every year including the year in which benefits comes into payment.
Contributions in excess of £50,000
• Contributions made by or on behalf of individuals that are in excess of £50,000 will trigger an annual allowance charge.  This charge effectively completely removes tax relief on pension contributions in excess of the annual allowance. The penalty must be calculated and paid by January 31 following the end of the relevant tax year.

Employer Contributions taken into account in calculating Annual Allowance
• Both employee and employer contributions will be taken into account in determining whether the annual allowance has been exceeded.  If the employer makes contributions in excess of the available annual allowance then a tax charge will be due by the employee on the value of the contribution at their marginal rate.

Defined Benefit Schemes
Specific provisions will be introduced to apply the rules to defined benefit (final salary) schemes.
Potential Increase in Deemed Pension Benefit
• There will be an increase in the multiplication factor used to calculate deemed contributions.  This will increase from 10 to 16 times the increase in the annual pension benefit together with the increase in the value of the lump sum during the pension input period.  The draft legislation does however allow for an inflationary increase on salary to be ignored in determining the increase in the value of an active scheme member’s pension fund.
• This change could be significant for some individuals who make significant personal contributions or individuals who have a decent increase in pension benefits in one year (for example, those who have a significant promotion or pay rise)  as the increase in deemed contributions could bring them over the £50,000 threshold and therefore in line for a charge.  The Government therefore intends to consult on the impact of this increase and discuss options for allowing such individuals to pay the charge out of their pension entitlement.

Tax relief band
20%, 40% or 50%
• Individuals will receive tax relief at their highest tax band rate (i.e. 20%, 40% or 50%) on all contributions within the annual allowance.

Rollover of Annual Allowance
Permitted 3 year carry forward of Allowance
• Any unused amount of annual allowance can be carried forward for up to three tax years.  This provision operates with effect from 2008/2009 but assumes that the annual allowance was only £50,000 in those earlier tax years. However this provision is only available if an individual was a member of a registered pension scheme in the tax year from which the relief is to be carried forward.

Lifetime allowance
• The ‘lifetime allowance’ for tax relievable pension saving will be  £1.5 million (reduced from £1.8 million).  Any funds taken that exceed this limit when pension benefits are taken will suffer a penalty charge of 55% on the excess if the excess is taken as a lump sum or 25% if taken in the form of a pension.
• The Government however, in recognition of the fact that some individuals already may have more than £1.5 million or have planned for more than this new limit, introduced transitional provisions.

“The value of your investment can fall as well as rise and you may get back less than you pay in.”

Veracity financial planning is not responsible for, nor does the Financial Services Authority regulate advice given with regard to taxation matters regard to trusts; some aspects of tax advice; commercial mortgages or second charge secured lending.
“The value of your investment can fall as well as rise and you may get back less than you pay in.”