• AffinityFinance • Independent Financial Advisors • PO Box 2096, Worthing, West Sussex BN12 9AS •
We all have a need to plan for our own retirement, and it may last for 20 to 30 years, or even longer. When Lloyd George first declared the State Pension system in 1908, which you got if and when you reached 70, the average male life expectancy was between 65 and 70 years. It was not until 1925 that the National Pension Age of 65 was introduced; and it only became available to all qualifying citizens, including women, after World War II in 1945.
Today the average national life expectancy is between 78 and 82, and rising all the time; and the Basic State Pension amounts to some £110 per week. Whilst this is at least a starting point, it may not be enough on its own. So, if you want an income in retirement which is better than this, you need to do something about it yourself.
Pension Savings Plans are designed to help you secure a Personal Retirement Income in a convenient and tax efficient way.
They attract Income Tax Relief up to your highest rate of taxation. For a Basic Rate Taxpayer this amounts to a 20% Tax Credit. Therefore, if you save £80, the government will uplift this to £100 in total. For Higher Rate Taxpayers, another 20% or 30% can be reclaimed amounting to a total Tax Benefit of £40 or £50 respectively.
Furthermore, once a Pension Plan has been set up, the Contributions you make, become a routine habit, and have a good chance of continuing - alongside any other commitments.
The downside is that you can only access your Pension Benefits from Age 55; and even then you are limited as to what you can do with them. Upto 25% of the final Plan Value can be taken directly by you as a Tax-Free Capital Sum; and the remaining balance must be used to generate a Retirement Income which is taxable under the PAYE system.
Meanwhile, throughout the accumulation phase, you can contribute upto the prevailing Annual Allowance of £3,600 per annum - even if you don’t have any earned income; or upto 100% of your earned income subject to an upper limit of £50,000. There is also a maximum Lifetime Allowance of £1.5 million You can exceed these allowances but any amount over them will incur tax penalties rather than tax benefits.
Pension Contributions are usually converted into Investment Assets in the interest of becoming more productive until you need to realise them as a Retirement Income in cash again. The problem here for the average non-professional investor, is what to invest in, and how to do it?
There is a vast array of Pension Investments available today, including many highly credible and successful Collective Investment Funds both in the UK and worldwide. But with a minimum choice of more than 2,000 different Investment Funds alone, making the right choices can be overwhelming, and it constantly changes.
A Pension Plan won’t work if nothing is put into it; but how well it works is largely controlled by how and where the money is invested.
At the other end of the journey comes the pleasure of stopping work and drawing your Retirement Income.
Gone are the days when the only real choice was to use all of your Pension Savings to buy a Retirement Annuity from your current Pension Provider. Today, not only can you choose any annuity you like from any company; but you can now also choose not to take an annuity at all, but opt instead for a Pension Drawdown Plan.
Most people are familiar with the basic mechanics of a Pension Annuity whereby your Pension Savings are used to buy an Annuity Contract which guarantees a certain Retirement Income for the rest of your life. And for many people this is still the right choice.
Pension Drawdown Plans however, remove the rigidity of an Annuity, and replace it with a very flexible scheme which puts you in control of how much income you take and when you take it. Furthermore, if you don't survive to a ripe old age, then in simple terms, the remaining balance of your Pension Drawdown Plan is passed on to your chosen Beneficiaries - be they spouses, children, or anyone else.
However you choose to take your Retirement Income there are a lot of important decisions to make.