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Free Guide: Enhancing Pension Contributions

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Planning for your retirement is one of the most important financial decisions you will make and no matter what your age or how far away from retirement you are, putting savings plans in place as early as possible to maximise your pension pot is vital.

We have produced a free Guide to Enhancing Pension Contributions for a Brighter Future to help you decide how to maximise your pension savings :

Passing on wealth through your pension

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New research reveals that almost a fifth of those aged over 55 (18%) do not plan to access their tax-free pension cash, to enable them to pass on more wealth to loved ones without incurring Inheritance Tax charges. Men are more likely to do this than women, and 38% of workers also plan to leave their tax-free pension cash where it is, three in ten over-55s say they were unaware of this.

If you’d like to discuss how to transfer wealth through your pension, please get in touch:

Will you make the right decisions around your pension pot?

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Will you make the right decisions around your pension pot?

The announcement of the removal of the Lifetime Allowance (LTA) from the 2024/25 tax year in the Spring Budget 2023 has made defined contribution pensions even more appealing for wealth transfer. This benefits individuals over 55 who intend to leave their tax-free lump sum intact with their pension to maximise their benefits.

There may be further changes to pension allowance rules. However, removing the LTA charge allows for an unlimited sum tax-free for individuals who pass away before age 75. After the age of 75, the sum will be subject to taxation at the beneficiary’s marginal rate. It is important to note that although the charge has been removed, an LTA check still takes place to work out available tax free cash and the taxation of certain lump sum payments.

Without incurring Inheritance (IHT) Tax

New research* reveals that almost a fifth of those aged over 55 (18%) do not plan to access their tax-free pension cash, to enable them to pass on more wealth to loved ones without incurring Inheritance Tax charges. Men are more likely to do this than women, and 38% of workers also plan to leave their tax-free pension cash where it is, three in ten over-55s say they were unaware of this.

Pensions usually don’t count towards a person’s estate for IHT purposes, and can be passed on completely tax-free if someone dies before the age of 75. With no LTA charge and an increased annual pension allowance, pensions have become attractive for those looking to mitigate IHT.

Pension as a tax-free lump sum

The research also found that almost half of all consumers (46%) believe that the amount that can be taken out of a pension as a tax-free lump sum should increase in line with inflation. It is worth noting that since the LTA has been abolished, an LTA check still takes place to work out available tax free cash and the taxation of certain lump sum payments. This means that individuals are currently limited to withdrawing a maximum of 25% of the previous LTA as a tax-free lump sum from their pension, unless any protection is in place.

Tips to ensure your beneficiaries benefit from your pension:

  • Check if your pension offers death benefits: Not all pensions provide the same level of flexibility when it comes to death benefits.
  • Check with your provider to see if your pension plan allows you to nominate beneficiaries who will inherit your pension savings, as beneficiary drawdown may not be an option.
  • Specify your beneficiaries: While making a Will can be beneficial in many ways, it usually doesn’t control who inherits your pension savings. Your pension provider or trustees have the final say in where your pension savings go.
  • Name your beneficiaries directly with your pension provider or employer to ensure your wishes are considered.
  • Regularly review your beneficiaries: Life circumstances change, and reviewing and updating your beneficiaries as needed is essential. Major life events like the birth of children, marriages or divorces can impact who you want to receive your pension savings. Ultimately the trustees of a scheme have discretion. So although there are no guarantees, by keeping your beneficiaries up to date, you can ensure that your desired
  • Beneficiaries are considered first when it comes to your pension savings should you pass away.
  • Consider the tax implications: Pensions can be a tax-efficient way to pass on your wealth since they are not typically subject to
  • Inheritance Tax. With the removal of the lifetime allowance charge, pensions offer an even more attractive option for passing on your wealth to your loved ones. However, it’s essential to consider any potential tax liabilities your beneficiaries may face when receiving your pension funds.

Remember, seeking professional advice tailored to your specific circumstances regarding financial planning and pension matters is essential.

Do you want to discuss creating a retirement plan to give you the confidence to enjoy later life?

Retirement should be the golden age of your life. It’s when you finally relax, enjoy new hobbies, travel or spend time with loved ones. But retirement can only be fully enjoyed if you have financial freedom. To discuss your options or to find out more, please get in touch with us using the form below:

 

*Opinium conducted research for Standard Life among 2000 UK adults, aged 18+ between 12-16th May 2023, results weighted to nationally representative.

How much of my pension can I take tax-free?

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Many over-55s are unaware that they can access 25% of their pension pot tax-free.

A surprising 43% of individuals over 55 need to be made aware that they can withdraw 25% of their pension pot tax-free, according to recent research[1]. Knowledge could lead to better decision making when it comes to accessing pension savings.

Similarly, 52% of those surveyed between the ages of 50 and 54 were also unaware of this rule, indicating a widespread lack of understanding about pension withdrawal options.

We answer the important questions regarding tax-free pension withdrawals.

How much can I withdraw from my pension tax-free?

Typically, most people can withdraw 25% of their total pension pot tax-free, although this may vary depending on the type of pension plan and if you’ve exceeded your lifetime allowance. The remaining 75% is subject to Income Tax when withdrawn.

When can I take my tax-free lump sum?

Generally, you can access your pension savings, including the tax-free lump sum, at age 55 (rising to 57 in 2028). In rare cases, you may be able to access your pension earlier due to ill health or a protected scheme.

Can I take my lump sum in smaller amounts?

This depends on your pension product and its terms. Taking smaller withdrawals over time can be beneficial in most cases, as it allows for potential growth and tax-efficiency.

Should I take my lump sum immediately?

It’s essential to consider the longevity of your pension savings throughout retirement. Taking too much too soon could result in running out of funds later in life. Delaying access to your savings may allow for additional growth.

Are there any implications to be aware of?

Accessing your pension savings can impact state benefits, such as Universal Credit or Pension Credit. Additionally, taking a tax-free lump sum won’t affect the amount you can contribute to your pension plan, but accessing taxable income may reduce your annual allowance.

Professional financial advice

Understanding your pension withdrawal options and seeking professional financial advice will help you make informed decisions and maximise your retirement savings. To learn more about how we can help you, please contact us today.

Source data: [1] Opinium conducted research among 2,000 UK adults aged 18+ between 12″16 May 2023 for Standard Life, part of Phoenix Group. Results have been weighted to be nationally representative.

Important information: A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the 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.

Pension pot options

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What can I do with my pension pot?

  1. Leave it untouched for now and take the money later
  2. Receive a guaranteed income (annuity)
  3. Receive an adjustable income (flexi-access drawdown)
  4. Take cash in lump sums (drawdown)
  5. Cash in your whole pot in one go
  6. Mix your options

For more guidance on your pension planning options, please get in touch.

What can I do with my pension pot

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Grow and protect your pension, both now and in the future.

For most, retirement will be funded in the main by a pension. It is therefore vital you have a robust plan in place that will allow you to grow and protect your pension, both now and in the future.

With ever-changing rules and regulations, we now have a pension system that is often difficult to navigate, putting many of using this as a savings vehicle.

When it comes to deciding how to use your pension pot, there’s no one ‘right answer’. The earliest you can start getting a Defined Contribution pension is usually when you’re 55 – you should check this with your pension provider. You might be able to get your pension sooner if you’re retiring due to ill health.

What are your pension options to consider?

Leave your pension pot untouched for now and take the money later

It’s up to you when you take your money. You might have reached the normal retirement date under the scheme or received a pack from your pension provider, but that doesn’t mean you have to take the money now. If you delay taking your pension until a later date, your pot continues to grow tax-free, potentially providing more income once you access it. If you do not take your money, we can check the investments and charges under the contract.

Receive a guaranteed income (annuity)

You can use your whole pension pot, or part of it, to buy an annuity. It typically gives you a regular and guaranteed income. You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into an annuity, providing a taxable income for life.

Some older policies may allow you to take more than 25% as tax-free cash We can review this with your pension provider. There are different lifetime annuity options and features to choose from that affect how much income you would get.

Receive an adjustable income (flexi-access drawdown)

With this option, you can normally take up to 25% (a quarter) of your pension pot, or of the amount you allocate for pension drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this might be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life, so you need to manage your investments carefully.

Take cash in lump sums (drawdown)

How much and when you take your money is up to you. You can use your existing pension pot to take cash as and when you need it and leave the rest untouched, where it can continue to grow tax-free. For each cash withdrawal, normally the first 25% (quarter) is tax-free, and the rest counts as taxable income.

There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income, and it won’t provide for a dependent after you die. There are also tax implications to consider that we can discuss with you.

Cash in your whole pot in one go

You can do this, but there are certain things you need to think about. There are clear tax implications from withdrawing all your money from a pension. Taking your whole pot as cash could mean you end up with a large tax bill – for most people, it will be more tax-efficient to use one of the other options. Cashing in your pension pot will not give you a secure retirement income.

Mix your options

You don’t have to choose one option: you can mix them over time or over your total pot when deciding how to access your pension. You can mix and match as you like and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish and get tax relief up to age 75.

Financial situation at retirement

It is important to sum up the pros and cons of taking an annuity vs drawdown.

The way you draw an income from your pension is likely to be largely determined by your financial situation at retirement. Will you, for example, still be paying of your mortgage, or do you have any other significant debts? What other income sources, aside from the State Pension, will you have at your disposal?

While an annuity can offer you the security of a guaranteed regular income, a drawdown plan gives you the chance to grow your pension and overall wealth during retirement. The latter route is likely to suit those with a stronger appetite for risk, as any significant market swings could potentially cause serious damage to your pension savings.

For more information on our pension planning services, please do not hesitate to get in touch to start your financial planning journey today.

Annuity vs Drawdown

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Ensure your retirement strategy meets your needs and goals

Pension annuities

Benefits Risks
Provides guaranteed income for life and cannot be affected by market fluctuations. If you pass away shortly after taking one, you won’t benefit from the full value you paid upfront.
Some policies guarantee indexation meaning the pension will rise with inflation over time. Rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension.

Pension Drawdown

Benefits Risks
Offers more flexibility and money can be taken when it is needed. Markets can potentially be volatile and there may be no guaranteed income from investments.
Any money left in the drawdown pot will not be liable for Inheritance Tax. If too much is taken out of your drawdown pot, then you could face hefty tax bills.

Retirement planning services

It’s important that professional advice is taken before deciding upon a retirement strategy. The right strategy should be tailored to the individual’s needs and circumstances.

What is pension drawdown?

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Financial Planner, Amy Burge, explains what Pension Drawdown is, what pension planning services we offer and how she has helped a client with their pension planning.

Pension drawdown or annuity?

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Make sure your retirement strategy meets your needs and goals.

It’s important to make a well-informed decision when it comes to deciding what to do with your pension pot: drawdown, annuity, or a combination of both. Making the right choice will affect your retirement for many years.

Pension drawdown gives you freedom and flexibility, allowing you to choose your annual income, whereas annuities provide steady income and security. For those who want both, they can purchase an annuity with part of their pension whilst keeping the rest in a drawdown agreement – giving them the best of both worlds.

The decision of whether to use drawdown or annuities can be a complex one, and professional advice is essential. Depending on your circumstances, either option may be suitable, with some preferring the security of knowing their income will remain stable for life, while others find the greater flexibility of drawdown more conducive to their retirement plans.

Flexible access pension (drawdown)

Pension drawdown can provide more flexibility and control over how your money is managed in retirement. Drawdown is an increasingly popular option for retirees to receive an income during their retirement. This method of taking an income allows individuals to access their pension fund in a tax-efficient way, as withdrawals are only taxable when they exceed the Personal Allowance.

The main advantage of pension drawdown for retirees is that it offers more flexibility than other options such as annuities or lump sum payments. Retirees can take out whatever amount they require, when they need it, and don’t have to commit to fixed payments over time, allowing them the freedom to make their own decisions on how they wish to use their pension savings.

Another benefit is that any money left in the drawdown pot will not be liable for Inheritance Tax. This is beneficial for those who wish to leave a legacy for their beneficiaries, as the remaining investment can pass directly to them without being taxed.

On the other hand, choosing drawdown does come with some risks. Retirees should consider that markets can potentially be volatile and there may be no guaranteed income from investments. Withdrawing too much capital can also leave you exposed should you live longer than anticipated. It’s important that individuals understand how they plan to invest their pension savings and how any losses or gains might affect them in future years. Additionally, if retirees take too much out of their drawdown pot, then they could face hefty tax bills.

Overall, it’s important that professional advice is taken before deciding upon a retirement strategy. While drawdown can offer more flexibility than other options, it’s important to weigh up all the pros and cons before deciding. Ultimately, the right strategy should be tailored to the individual’s needs and circumstances.

Pension Annuities

In contrast to drawdown, pension annuities provide a guaranteed lifetime income, but they also carry risk; if you die shortly after taking out an annuity it means that you won’t benefit from the full value that you paid for upfront. This can make them unsuitable for those with shorter life expectancies compared to those who are expected to live longer. The current rates available on annuities may be attractive when compared to those in the recent past, and this can be an incentive for those previously deterred by low returns.

The benefits of an annuity include long-term security, since the income is guaranteed for life and cannot be affected by fluctuations in investment returns or other market factors. Plus, some policies guarantee indexation which means that the pension will rise with inflation over time. This helps to ensure that retirees have sufficient funds to maintain their lifestyle going forward.

However, there are also downsides to consider when deciding whether an annuity is right for you. Annuity rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension. Plus, the income is fixed and cannot be adjusted, so if your circumstances change in retirement and you require more funds it may not be possible to increase the amount you are receiving.

Ultimately, professional advice should always be sought with an annuity purchase as there can be a number of factors that need to be taken into consideration before making a decision. It is important to fully understand the terms of the policy and make sure that it is suitable for your individual situation before committing to anything long-term.

Combination of drawdown and annuities

For some people, a combination of pension drawdown and annuities may provide the best balance between security of income and control over withdrawals – we can help to determine which option is most suitable for you. Ultimately, it’s important to understand all aspects of both drawdown and annuities, including the pros and cons of each, before deciding.

Making sound financial decisions requires due diligence and considering all relevant factors so that your retirement goals are met in the most efficient way possible. Therefore, it is important to consider both drawdown and annuities when planning for retirement, and professional advice is key to making an informed decision. With the right knowledge and professional advice, you will be able to decide as to which option is most suitable for your circumstances.

By considering all relevant factors, you can make sure your retirement strategy meets your needs and goals.

Our retirement planning services

As we all live longer and enjoy unprecedented freedom to decide our own retirement options, it has never been more important to have clarity over what you want to do and how much money you’ll need to achieve that.

Through our retirement planning services, we can help you position your finances so that you are confident of maintaining a good standard of living and have the income to realise your life goals, whatever they may be. For more information, please contact us.

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