As it’s Pension Awareness Day on Sunday, it would be remiss of us not to talk about the many benefits of and myths surrounding pensions, especially given the numerous awards we have won for the retirement planning service we offer to our clients.
The Benefits of Pensions
Did you know that monies invested in pensions grow tax free, just like ISAs? Well, they do, the fund isn’t taxed at all and if you’re careful about how you draw it out again it can be tax free too.
Did you know that you can leave your pension fund to anyone you want to, whether you are related to them, or whether they are dependent on your income, or not? Well, you can.
Did you know that HMRC still gives tax relief on pension contributions at the highest rate you pay income tax (even if you don’t pay any!) and that you can reduce the amount of tax you pay by saving for your retirement in a pension? Well, you can.
Did you know that you can choose how much income you take from your pension fund, changing your mind about how much as often as you like (within reason)? Well, with flexi-access drawdown you can.
Did you know that charges on personal pensions are much, much lower now than they used to be? Well, they are (and we shop around to find the best value ones for our clients).
Did you know that insured pension funds have financial services compensation scheme cover of 90% of the value of the fund, with no upper limit, if your pension provider becomes insolvent? Well, they do.
As the basic state pension is around £8,700pa that leaves £3,800pa that can be drawn from a pension (if you have no other taxable income) before you have to pay any tax and if you haven’t already taken all the tax free element of your pension pot you could draw £5,066 from your pension pot, have a total income of £13,766pa and not pay any income tax! If your spouse can spare 10% of his, or her personal allowance (tax code) you could increase that to £15,433 pa tax free!
Pensions in addition to other investments can help you maximise your net income in retirement by making use of all your tax allowances. Yes, it can be complicated, but that’s what we are here for, to help you find the best way to achieve your pension goals.
The Myths of Pensions
Your pension dies with you. This is only true if you use your pension funds to buy a fixed income with an annuity, with no capital protection, guarantee, or spouse’s pension. Any unspent pension funds in drawdown, or not already spent on an annuity can be left to whomever you choose.
When your pension fund exceeds the Lifetime Allowance you will have to pay tax. – Not true, you only have to pay Lifetime Allowance Tax when you take benefits that exceed the Lifetime Allowance. Taking benefits within the Lifetime Allowance will not lead to any tax having to be paid until you die, or reach the age of 75 (under current rules, there has only been a Lifetime Allowance since 2006 and it has changed many times). This is complicated, but we are here to help with that.
Property is better than a pension – This really depends on if the rental income you receive from property, after all the taxes involved have been paid exceeds what you could get from an investment, with tax breaks, specifically designed to provide retirement income. If you lose your tenants, or they don’t, or can’t pay their rent, it becomes your problem, it’s not tax efficient, it’s not liquid, it’s not flexible and all your money is tied up in one type of asset – not a low risk strategy!
I could go on, but I think that’s enough for now. The moral of the story is that quality advice is available from objective, independent professionals whose duty of care is to you as their client, not to the organisation that pays them. Do let us know how we can help you.
This post was written by Chartered Financial Planner Chris Bibb ACII, FPFS, Certs CII (MP & ER), Certs PFS (DM & Securities). To find out more about how Strategic Solutions can help you with planning your pension click here.