If you are approaching retirement age, it’s important to know your pension is going to finance your plans.
Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.
It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.
Fact: The government pays most UK adults over the pension age a State Pension, which is currently:
Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record.
If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.
Fact: Most people are automatically enrolled into a workplace pension.
Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary.
If you keep your contributions at the minimum level, it might be difficult to save enough for retirement.
As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.
Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22).
That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%.
However, there are ways of withdrawing the money with a tax charge of 25%.
Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement.
This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.
If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement.
You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.
Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings.
But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people.
Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.
Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die.
But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.
If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028). 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.
This content is for your general information and use only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. All figures relate to the 2018/19 tax year, unless otherwise stated.