Pensions

Pension Allowance

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Pension Allowance

The maximum amount of contributions on which a member can claim tax relief in any tax year is greater of:

  • the ‘basic amount’ – currently £3600 gross, and
  • the amount of the individual’s relevant UK earnings that are chargeable to income tax for the year.

Lifetime Allowance

Tax Year Amount
2016/17 to 2017/18 £1,000,000
2018/19 £1,030,000
2019/20 £1,055,000
2020/21 to 2025/26 £1,073,100

Lifetime Allowance Charge: 55% on excess paid as a lump sum and 25% on excess designated for drawdown, annuity or scheme pension.

Annual Allowance

Tax Year AA Amount MPAA Amount
2016/17 £40,000* £10,000
2017/18 to 2022/23 £40,000* £4,000

Annual Allowance Charge: Marginal income tax rate on excess, subject to a minimum of 20%.

Carry forward of up to three years unused annual allowance available.

Money Purchase Annual Allowance (MPAA): applies with no carry forward to money purchase pensions once flexible pension income taken from 2015/16.

*Tapered annual allowance: from 2016/17 to 2019/20, tapered by £1 for every £2 of ‘adjusted income’ over £150,000 to a minimum of £10,000 if ‘threshold income’ is also over £110,000.

For 2020/21 to 2022/23, tapered on the same basis if adjusted income over £240,000 and threshold income over £200,000 to a minimum of £4,000.

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Pension Lifetime Allowance Q&A Infographic

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If you are a high-income earner or wealthy individual, you could be putting too much into your lifetime pension and risk exceeding the pension lifetime allowance.

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Pension Lifetime Allowance Q&A

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How to stay within the limit to avoid a tax charge.

If you’ve been diligently saving into a pension throughout your working life, you should be entitled to feel confident about your retirement.

But, unfortunately, the best savers sometimes find themselves inadvertently breaching their pension lifetime allowance (LTA) and being charged an additional tax that erodes their savings.

The following questions and answers are intended to help you avoid this tax charge.

Q: What is the lifetime allowance?

A: The LTA is a limit on the amount you can withdraw in pension benefits in your lifetime before you trigger an additional tax charge. By pension benefits, we mean money you receive from your pension in any form, whether that’s a lump sum, a flexible income, an annuity income or through any other method. This allowance applies to your total pension savings, which may be in different pensions.

Q: How much is the Lifetime Allowance?

A: In the 2021/22 tax year, the LTA is £1,073,100. This allowance has now been frozen until April 2026.

Q: What happens if you exceed the Lifetime Allowance?

A: Once you have received your full LTA in pension benefits, you will be required to pay an additional tax charge on any further benefits you receive. If you take your remaining benefits as a lump sum, you’ll pay a tax charge of 55%. If you take your remaining benefits as multiple  withdrawals, you’ll pay a tax charge of 25% on each one.

Q: How is the usage of your Lifetime Allowance measured?

A: Each time you access your pension benefits (for example, by purchasing an annuity, receiving a lump sum or establishing a flexible income), this is recorded as a ‘benefit crystallisation event’. There is an additional benefit crystallisation event when you turn 75, and finally, upon your death.

Q: Is Lifetime Allowance protection available?

A: You can only protect your pension from the LTA if your savings were worth more than £1 million on 5 April 2016. You may be able to
protect your pension savings up to £1.25 million, or up to the value of your pension on that date, depending on the type of protection you have.

Q: Is it possible to avoid the Lifetime Allowance?

A: If you do not have LTA protection and you are approaching the limit, there are various actions you can consider. These include stopping your contributions (and, instead, investing your money into an alternative tax-efficient environment), changing your investment strategy or starting retirement earlier.

Q: When should you seek professional advice?

A: The rules around the LTA are very complex and making the right decisions can feel difficult. Receiving professional financial advice will help to identify if you have a problem and offer different solutions to consider, based on a full review of your unique circumstances.

Let us help you make the most of your money – and your future

Everyone deserves a great retirement. Your goals and ambitions are unique to you and we want to help you get there. To discuss your retirement plans, please contact us. Visit our pension Lifetime Allowance page for more information.

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Mind the pension gender gap

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The pension gender age gap Women are being urged to think about their long term savings

Women are still behind men when it comes to retirement savings, which is why they need to consider the pension gender gap.

Imagine reaching retirement age and discovering that, despite years of saving, you don’t have enough money to get by. Worse still, suppose you’re unable to pay for the right kind of care in your old age.

If you and your partner separate or your spouse dies unexpectedly – will you have sufficient funds to see you through retirement? Now, all of these might sound like worst-case scenarios but, unfortunately, for women right across the UK one or more of them could become a reality.

Earning trends

The ‘Women and Retirement’ report[1] has found that if current work and earning trends continue, young women today will need to save an average of £185,000 more during their working life to enjoy the same retirement income as men.

The colossal gender pension gap is made up of a savings shortfall, plus the need to fund a longer retirement because women on average live longer than men. This also leads to higher care costs. Many women will naturally take time o! to start a family – resulting in gaps in their work history.

And even if women remain in the workforce, some still tend to earn less than men, on average.

Vulnerable situation

21% of women surveyed said they plan to rely at least partly on their partner’s income in retirement. However, this can leave women in a particularly vulnerable situation should they separate from their partner.

Right now, it’s rare for divorce settlements to account for pension assets, which means that women could end up in particularly unstable financial situations following divorce.

Funding retirement

Also, women tend to live longer than men – two to three years, on average. Indeed, this continued rise in longevity means that a 25-year- old man today can expect to live to 86, while a woman can live to 89.

And while rising longevity is of course a good thing, it does raise specific challenges – especially when it comes to funding retirement and old age.

Living longer

Together with living longer, women are also more likely to need care when they’re older. In fact, of the 6 million people in the UK over the age of 60 currently living with a disability, 3.5 million of them are women.

And those women who do need care spend on average a year longer in care homes than men. Right now, the average cost of care is £679 per week, which means women would need an extra £35,000 during retirement for residential care costs.

Moreover, as women can expect to live two to three years longer than men, they would also need around £50,000 for their retirement – bringing the total amount needed to match a man’s retirement income to £185,000.

Concerned about the gender pension gap?

As a woman, your pension is a key part of your retirement planning. How much you put away now, how you invest for the future and how you choose to access your pension once you’ve stopped working, are all key considerations for anyone hoping to enjoy a long and happy retirement. If you have any concerns or questions about your retirement plans, please contact us for more information.

Source data:

[1] Scottish Widows 2021 ‘Women and Retirement’ report – research carried out online by YouGov Plc across a total of 5,059 adults aged 18+. Data weighted to be representative of the GB population. Fieldwork was carried out between 23 March and 3 April 2021 through an online survey. 5,059 interviews were carried out. The sampling criteria were based on four key metrics: age, gender, region and social grade.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

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Staggered Retirement

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A more popular and increasingly common option many are considering.

Giving up the 9-to-5 doesn’t necessarily mean stopping work. But retirement planning has taken on an entirely new dimension as a result of the COVID-19 pandemic outbreak with many big questions being asked. When you picture yourself in your golden years, are you sitting on a beach, hitting the golf course, or still working behind a desk? For many people of retirement age, continuing to work is an option they are considering. Increasingly people are planning to stagger work or work flexibly. This can really appeal to some individuals who have caring responsibilities or health issues, or who are thinking about retiring in the next few years. 

Sudden transition from working five days a week

Several decades ago, working and retirement were binary terms, with little overlap. People were either working (and under the age of 65) or had hit the age of 65 and were retired. That’s no longer true, however, as staggered retirement is becoming more popular and more common.

Few people benefit from the sudden transition from working five days a week to not working at all. Retirement can often be an unsettling period and it’s not surprising given that the most common path into retirement is to go ‘cold turkey’ and simply stop working. 

More flexible retirement and working part-time

New research has highlighted the fact that fewer people are deciding against completely stopping working and are opting for a staggered and more flexible retirement and working part-time[1]. Nearly one in three (32%) pensioners in their 60s and 16% of over70s have left their pensions untouched. And of those who haven’t accessed their pension pot, nearly half (48%) of those in their 60s, and 24% of over-70s, say it is because they are still working. With people living longer, and the added prospect of health care costs in laterlife, retirees increasingly  understand the benefits of having a larger pension pot in later life.

Pensions are required to last as long as possible

Of those who haven’t accessed their pension pot, half (51%) say it is because they are still working while more than a quarter (25%) of people in their 60s say it is because they want their pensions to last as long as possible. Of course, retirees who haven’t accessed their pension pot must have alternative sources of income. When asked about their income, nearly half said they take an income from cash savings (47%), others rely on their spouse or partner’s income (35%) or State Pension (22%) while 12% rely on income from property investments added prospect of health care costs in laterlife, retirees increasingly understand the benefits of having a larger pension pot in later life. 

Offering people different financial and health benefits

This trend for staggered retirements offers many financial and health benefits. It is often taken for granted but continued good health is one of the best financial assets people can have. The benefits of working – such as remaining physically active and continued social interaction – can make a big difference to people’s mental wellbeing and overall health in retirement. People are increasingly making alternative choices about retirement to ensure that they do not run out of money, but it’s also really important to make pension savings work past retirement age so as not to miss out on the ability to generate growth above inflation for when there is the requirement to start drawing a pension. 

Worried about retirement uncertainty?

Planning your financial future is one of the most important things you can do in your life. Do you require professional advice and help with your retirement planning during this difficult time? Speak to us to find out how we can help you.

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Guide to the final countdown

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Time to review your financial plans with a financial check-up? 

If you are aiming to retire within the next five years, it’s time to get into the mindset of considering the practicalities of fulfilling your desired lifestyle and making plans. While you should think about retirement planning as early as possible, the five years leading up to retirement are critical. 

Retirement may be looming with terrifying urgency, and the reality is that you have just 60 pay packets left until you retire. This is a time when you’ll need to obtain up-to-date pension forecasts and obtain professional financial advice to make sure your retirement plans are on track. So, if you believe you are five years or less away from retirement, now is the time to seriously review your financial plans with a financial check-up.

What are the key things to concentrate on?

 The first step is to ask yourself if you are actually ready to retire. There are many factors to consider. Your financial affairs are the big factor to begin with. Your ability to afford retirement depends on your lifestyle, your family situation and home ownership. If you have dependent children, or have 15 years left on your mortgage, the time might not be quite right. You have to ensure retirement is the right move for you. Work can be stressful, but it can be rewarding and give you a sense of achievement. People may miss the routine of working life and the day-to-day interaction with people. 

Taking a different path

What you need might not be retirement, it could be change. A chance to get out from behind your desk to do something meaningful. Perhaps retirement is your ticket to achieving this – taking a different path where money is no longer the prime motivation. 

If you are afraid about having time on your hands after retirement, explore options for filling it well before you take the leap. 

Major change in lifestyle  

Retirement means a major change in lifestyle. You need a clear mind as to what you want your life to look like and how to spend your time. Then you can work on arranging your finances to suit. 

Decide on your priorities for retired life. Do you want to travel, or split your time between home and somewhere hot and exotic? Is there a particular hobby you want to immerse yourself in? What kind of leisure and social activities matter to you? 

Later years in your retirement

Try not to get caught up in what happens right after you end work – also consider the later years in your retirement. Will long-term travel continue to be feasible as you get older? Will you need such a large house, or will it become a burden? And what about in the latter stages of life? Would you need to fund care?  

You must also have a clear picture of what kind of life you would like to lead in retirement and what it will cost. Then you can start to dig a little deeper into what you might be able to afford. This means getting to grips with your sources of income once your earnings stop. 

Request up-to-date forecasts

Your first port of call is your pension – or pensions. Contact previous pension trustees to request up-to-date forecasts. If you’ve lost details of a pension scheme and need help, the Pension Tracing Service (0800 731 0193) may be able to assist you.  

You should also find out what your likely State Pension entitlement would be – you can do this by completing a BR19 form or by visiting www.direct.gov.uk. 

Consolidate existing pensions

If you have personal pensions, you need to find out where they are invested and how they have performed. Also check if there are any valuable guarantees built into the contracts. It may make sense to consolidate existing pensions, making it easier for y ou to keep track of everything and reduce the amount of correspondence you receive.  

With investments in general, it is important to review your strategy before you take the leap into retirement. You don’t need to suddenly become an ultra-conservative investor – you still want your portfolio to grow over the next few decades. Should the investment markets make a correction, you may want to limit your downside. Don’t forget, there may be another 30 years ahead. 

Don’t put off confronting the truth

If your investments don’t look on course to give you the income you’d hoped for in retirement, don’t put off confronting the truth. You may need to revise your projected living costs. Alternatively, there’s still time to change your investments, and you could also cut back on spending while you are still earning to generate more savings.  

Your income can be used in other ways besides topping up your savings as you prepare for retirement. Clearing debts, including your mortgage, should be a priority before you retire. Whatever you owe on credit cards and loans, focus on paying off the debt that charges the most interest first. Debt will be the biggest burden once you do not have a regular working income. 

Consider re-adjusting your finances

Having no mortgage to pay is a major step towards re-adjusting your finances for a post-salary life. You might also decide you want to sell up, whether to downsize, to give you a lump sum of cash to live off, or to fund your dreams of moving abroad. Either way, use your working income while you can to improve your home, maximising potential revenue when you come to sell it.  

Finally, retirement is a huge change, both personally and financially – so big it might be too much to take in all at once. It makes good sense to practice at being retired before it becomes a reality, especially if you will have to make certain adjustments and sacrifices to compensate for a reduced income. You might even consider a phased retirement, cutting back on your hours gradually. This will not only soften the financial effect, but it will also get you used to having more spare time to fill. 

Are you planning to enjoy your retirement?

One of the most important stages in life which everybody has to save for is retirement. You work hard to enjoy your current lifestyle, but are you doing enough to ensure that you can continue to enjoy it in your retirement?

If you would like to review your situation or arrange a meeting to discuss your retirement planning options, please contact us for further information – we look forward to hearing from you.

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Retiring happy

Retire Happy

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Retiring happyPlanning your future has arguably never been more important.

10 tips to enjoy the retirement you want

  1. Review your spending habits and consider if you have the scope to save a little more each month.
  2. Look up your annual benefit statements – you may have saved with more than one employer’s pension scheme.
  3. Think about what financial milestones you’d need to reach in order to increase your pension contributions and review your investment choices.
  4. Find out more about your current pension plan. If you pay in more, does your employer match your contributions?
  5. Track down old pension schemes using the government’s finder service https://www.gov.uk/find-pension-contact-details. Or request contact details from the government’s Pension Tracing Service on 0800 731 0193 or by post.
  6. Check that your Expression of Wish form is up to date. This is a request setting out whom you would like to receive any death benefits payable on your death.
  7. Check your State Pension entitlement. To receive the full State Pension when you reach State Pension age you must have paid or been credited with 35 qualifying years of National Insurance contributions. Visit the Government Pension Service https://www.gov.uk/contact-pension-service for information about your State Pension.
  8. Add up the savings and investments that you could use for your retirement. A pension is a very tax-efficient way to save for your retirement but you might also have other savings or investments that you could use to increase your income when you retire.
  9. If you’re getting close to retirement and the amount you’re likely to retire on is less than you’d hoped, consider ways to boost your pension.
  10. Decide when to start taking your pension. You need to set a target date when you want to start drawing an income from your pension – and remember, you don’t have to stop working to take your pension but you must be aged at least 55 (you might be able to do this earlier if you’re in very poor health).

Please contact us if you require any further information or guidance on your retirement.

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Scared of running out of money in retirement?

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Scared-of-running-out-of-money-in-retirementAre you scared of running out of money in retirement?

It has been well recognised that many are simply not saving enough into their pension pots for retirement. To avoid unwanted stress if you are planning to retire, you need to be absolutely sure your money is going to go the distance. Concerns you may have are:

  • Do I have enough to retire?
  • Will I run out of money, and when?
  • How can I guarantee the kind of retirement lifestyle I want?

Firstly, it is never too early to start saving for your future, and the earlier you start the better.

Pensions have a tremendous compound effect so the basic principle is the more you put in, the more you get out. The way you accumulate your retirement money and how you use it during your retirement will have a big impact on how long it will last – and also the amount of tax you pay.

Here are just some of the steps you can take to improve your pension pot size:

Making the most of pension tax relief

The Government encourages you to save for your retirement by giving you tax relief on pension contributions. This means some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund. For a more detailed look at pension tax relief visit https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Know your state pension

The State Pension is a weekly payment from the Government that you can receive once you reach State Pension age (66). The current state pension amount is £179.60 a week (2021-22), but you may get more or less than this.

To qualify for the State Pension you need a minimum of 10 years of National Insurance contributions. To find out more on how much State Pension you could receive and when visit https://www.gov.uk/check-state-pension

Investing during retirement

When it comes to investing during retirement, it is important not to view your portfolio with an element of finality. Your investment risk profile and strategy will almost certainly need to adjust to look at ways of making your money work as hard as possible, but with a view to generating earnings to boost your retirement income.

This is a time to look at how balanced your investments are and whether you are exposed to more risk than you are comfortable with. It is a time to review all your investments and decide how much you can afford to withdraw each year and whether this balances with your needs.

Let us take the fear out of your retirement planning?

It is always important to think ahead to retirement and not rush into making life-changing financial decisions. We can help you determine which retirement income approaches may be best for you based on your personal needs and goals. If you are scared of running out of money in retirement and would like to talk to us about your retirement requirements, then please get in touch.

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Building a better world

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Time for pensions to contribute towards building a better world

New landmark report from the United Nations on the state of climate science.

As we have been witnessing in recent years and months, climate changes are occurring in every region and globally. A new landmark report from the United Nations on the state of climate science has highlighted modern society’s continued dependence on fossil fuels, which is warming the world at a pace that is unprecedented in the past 2,000 years. Its effects are already apparent as record droughts, wildfires and floods devastate communities worldwide.

Put simply, net zero refers to the balance between the amount of greenhouse gas produced and the amount removed from the atmosphere. We reach net zero when the amount we add is no more than the amount taken away. The UK became the world’s first major economy to set a target of being net zero by 2050.

Greenhouse Gas

The Intergovernmental Panel on Climate Change report published on 9 August emphasises there is still time to act, but it must happen immediately. Limiting climate change demands strong and sustained reductions in greenhouse gas emissions from human activities such as burning fossil fuels.

One of the main areas where change can make a significant difference to all of our futures is how and where our pension money is invested. But the facts are, if money is invested in a standard, default pension, it could be doing more harm than good.

Climate Change

Your pension is more than just a retirement fund, it can also contribute towards building a better world. However, one in four pension scheme members have never even heard of net zero, while three in ten can’t explain or understand the connection with their pension pots and climate change.

According to new research[1], almost nine in ten Defined Contribution (DC) scheme members were not aware of the importance of having their pension scheme aligned with a net zero goal. But, encouragingly, members were overwhelmingly in favour of their pensions moving towards net zero when the term was explained.

Collective Power

The survey also uncovered that one in four (25%) further three in ten (31%) have heard of it but could not say what it means. In fact, 70% of DC members prefer remaining invested and using their collective power to engage with companies to align their businesses with global climate change efforts, or prepare them to thrive in a low-carbon economy.

Two-thirds (64%) of all members have become more concerned about the impact of human actions on the planet following the COVID-19 crisis. Rather than deprioritising environmental issues in favour of immediate concerns, the pandemic has thrust them into sharper focus as members explicitly linked them with their current situation.

Performance Impact

Millennials are the strongest supporters of engagement, with 79% of them supporting providers’ stewardship activities. Their attitude also helps to explain their change of heart towards outright divestment. While still the most radical cohort of the three generations on this issue, half of Millennial members would consider divesting if it had no performance impact, while only two in five of them would divest no matter what.

Baby Boomers are twice as likely as Millennials to want to keep pensions as diversified as possible, even if that meant investing in fossil fuels, but the proportion has dropped from 30% to 25% over the past 18 months. The research also shows that more than a fifth of ‘Boomers’ (22%) are now happy to divest into a greener pension regardless of performance. This follows increased coverage of climate in the mainstream media and real concern about the impact of climate change on their children and grandchildren.

Younger Views

Millennial men are the most likely to want a net zero pension irrespective of the impact on financial performance. The proportion who feel this way (40%) is double that of the group showing the least interest, female Baby Boomers (20%).

As Baby Boomers move steadily into their retirement years, the balance of power will shift as Gen X starts to hold the largest share of pension assets. Younger views will be an  important factor in shaping the direction of travel over the next ten years. This new cohort can no longer be assumed to be simply chasing maximum financial returns regardless of the impact on the planet.

What good could your money do?

Humanity has its work cut out to create solutions to the many complex problems of the 21st century. We help you assess the risks – and opportunities – posed by companies’ and countries’ performance in critical areas, such as climate change, executive remuneration, and diversity and inclusion. Please speak to us for further information – we look forward to hearing from you.

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Source data: [1] Survey conducted in April 2021, based on a population of 3,056 adults currently contributing to a workplace pension. Legal & General Investment Management published 14 June 2021.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless you have a plan with a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

Pension Awareness Day

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Pension Awareness Day

Are you financially match fit for the future?
Its Pension Awareness Day, which started back in 2014 by the team at Pension Geeks and aims to highlight the importance of pension saving.
There are lots of free events on their website including webinars and pension clinics to help both individuals and employers understand pensions and how to achieve the retirement they want.

A strategy of decades

At Ellis Bates we start the planning young! No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan. Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want, and which you are working hard for, and eventually want to enjoy when you eventually decide to stop working.

With so much going on in your life – from family and work to pursuing your passions – retirement planning may not be your priority, or even on your radar yet, but it’s your pension and overall short and long term savings plan that will deliver the lifestyle you want.

Take a look at our strategy for each decade at https://www.ellisbates.com/news/retirement-planning-journey/ and we look forward to helping you get financially match fit.

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