Pensions

At the moment most pensions can be taken from the age of 55, with up to 25% of the pension pot available as a tax-free lump sum and the balance providing an income.

In the recent past the majority of people at retirement purchased an Annuity to generate income.

With Annuity rates at historically low levels, there were concerns as to how much value was released and how long you would have to live to recoup your cash.

Although over the last 20 years for individuals with larger pension pots there were ways to take an income without buying an n annuity, this has now cascaded down and there is now no requirement to lock into an annuity

In this regard there are alternatives to an Annuity including:

Income Drawdown, also known as Capped Drawdown

Flexible Drawdown

Investment Linked Annuity

Fixed Term Annuity

You can still take up to 25% of your pension pot from age 55 onwards. But, there will be no restriction on the amount of income you can take, in fact if they wish the whole fund can be taken as a lump sum; this is possibly the most significant change in a generation.

A tax trap for the unwary - Any money withdrawn from the pension pot, except the tax-free lump sum, will be added to other income, for example the State Pension or salary, and then taxed which maybe at a rate of 20%, 40% or 45%.

For those people who still want to create a tax efficient income from their pension and don’t want to take the whole fund as a lump sum, all the existing choices, including an Annuity will be available.

The new proposals will certainly give extra flexibility and more choice. However, there will be added complication and an even greater number of decisions which need to be made to ensure you get the most from your Pension pot.

Not certain on the most suitable route? That’s not surprising, but we’re here to help

The changes will give everyone more flexibility and greater control over their pension, but there will be questions, complications and challenges:

-           How do you take advantage of the new proposals to suit your circumstances?

-           What combination of lump sums and income should you take?

-           What would be the most tax effective way of accessing the fund ?

-           How can you be sure you won’t run out of money?

-           How should you invest your pension?

-           Is an Annuity now the wrong option?

 Are you saving enough for your retirement?

From a simple stakeholder plan, to a personal pension plan with a universal range of funds, to the investment freedom of a self-invested personal pension, we can help you make the right choices to boost your income in retirement.

Question: Why invest in Pensions?

Answer: To significantly boost your investment

Each time you contribute to your personal pension the government will automatically add 20% (basic rate tax relief), significantly boosting the amount that gets invested.

The tax benefits of a SIPP

Or for example if you wish to contribute £10,000 to your personal pension, the Government will pay £2,000 of this (20% of £10,000),this means as a basic rate tax payer an investment of £10,000 costs you just £8,000.

Non-taxpayers such as children or pensioners are entitled to the same rate of tax relief on contributions of up to £3,600 gross. If you're working you can contribute up to 100% of your earnings for this tax year.

Higher rate taxpayers can turn £6,000 into £10,000

As well as the basic rate tax relief shown above, if you're a higher rate taxpayer (and you have sufficient earnings in the higher rate tax bracket) you can claim up to a further 20% tax relief via your tax return. This means a gross pension contribution of £10,000 could effectively cost you just £6,000.

Tax relief in a SIPP: How to turn 6,000 into 10,000

45% rate tax payers can turn £5,500 into £10,000

As well as the basic rate tax relief shown above, if you're an additional rate taxpayer (the new 45% tax for income over £150,000) you can claim up to a further 25% tax relief via your tax return. This means a gross pension contribution of £10,000 could effectively cost you just £5,500. You must have sufficient earnings in the additional rate tax bracket and care may be required to ensure your contributions are within guidelines.

From the tax year 2016/2017 there will be a new limit on what can be paid into Pension funds for additional higher rate tax payers. I.e. this affects those on ££150,000 per year of earnings.

Further tax benefits

Don't forget that once invested in your pension the funds will grow free of UK capital gains tax and income tax (tax deducted from dividends cannot be reclaimed).

When you retire 25% of the value of the fund can normally be taken as a tax free lump sum, with the remainder remaining monies then utilised towards providing an income for you in retirement and this can be done through a number of options.

No inheritance tax if you pass away before retiring

If you pass away before you begin taking the benefits from your pension the funds will normally be passed to your spouse, a suitable Trust or other elected beneficiary free of inheritance tax.

 At or near retirement

Your pension benefits can usually be accessed at any stage between 55 years of age onwards. If you wish to draw your pension before retiring, you can continue to work and draw your pension benefits at the same time.

There are a number of different options to access your pension funds tax efficiently, including drawing an income from the fund, phasing in payments including tax-free sums, taking an annuity / ill health annuity, or indeed a combination of the above.

The overriding factors will be the size of your fund, and your objectives, which will dictate when and if you can afford to retire.

Paton Wealth Management are experts in this area. If you are considering accessing your pension benefits we would always recommend a second opinion.

For further advice and assistance contact us on 0141 353 5048 or email direct toenquiries@patonwealthmanagement.co.uk

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The Financial Conduct Authority does not regulate taxation, tax planning or trust advice. Levels and bases of, and reliefs from, tax are subject to change.

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