Some people want to travel the world or take up a new hobby when they retire. Others see it as a perfect opportunity to volunteer with a charity or start their own business. Whatever you are planning for the future, we can help you to make the most of your pension and other investments to achieve the retirement you want.
The difference between retirement planning and pensions
Although the terms retirement planning and pensions are often used interchangeably, they are in fact different.
Essentially, a pension is a type of savings plan you pay into during your working life and draw on when you retire. There are a number of different types of pension plans including:
- The state pension, provided by the government and funded by national insurance contributions
- Private pensions, which largely fall into three categories:
- Defined contribution pension schemes (including stakeholder pension schemes and personal pensions), where the amount you will receive is based on how much you and/or your employer have paid into it, along with any investment growth
- Self-invested Personal Pensions (SIPPs), which are a type of defined contribution scheme but with extra features, such as income drawdown and wider investment options
- Defined benefit pension schemes, which are usually workplace pensions. The amount you receive when you retire is based on different factors including length of service and your salary. Defined benefit schemes are more commonly known as final salary pension schemes. It’s important to note that while a final salary scheme is a type of defined benefit pension scheme, there are a number of defined benefit schemes which are not final salary pension schemes, such as career average pension schemes or cash balance pension schemes
A pension is not the only way to fund your retirement income. Many people choose to pay for their retirement through a combination of:
- Cash savings
- Investments, including ISAs
- Property income
- An inheritance
Effective retirement planning takes all of these possible income streams into account and considers them alongside your long-term life goals.
At Evelyn Partners, we get to know you and find out about your individual financial situation and what you want out of your retirement. We look at what you have and where you want to go. Then, we work with you to create a tax-efficient retirement plan to pay for the retirement you have always wanted.
Talk to Evelyn Partners about retirement planning and pensions
Speak to us and we'll arrange for one of our experienced financial planners to contact you to discuss how we can help with your retirement and pension planning. They'll provide you with a clear proposal for you to review before deciding whether to work with us.
The pension protection fund
The pension protection fund (PPF) protects members of final salary or defined benefit schemes if the employer funding the pension becomes insolvent and there are insufficient funds to pay out promised benefits. The PPF is paid for by the schemes it protects.
For more details on the PPF and how it could protect your pension, visit their website.
How much money do I need in retirement?
Retirement planning usually starts with thinking about what you want your future to look like. Then, it is possible to calculate how much money you will need to achieve your goals. Using this, we can analyse your savings and outgoings to find out how long your money will last and whether you’re on track, or look at what you need to do to get there. We call this cashflow modelling.
How much should I pay into my pension?
There is no set amount that you should be paying into your pension. The pension annual allowance, the maximum amount you can pay into your pension each year without triggering a tax charge, is currently set at £60,000 or 100% of your relevant UK earnings (whichever amount is lower).
How much you should be contributing to a pension depends on a number of factors including your:
- Current income
- Proposed retirement age
- Employment status
- Required retirement income
The tax benefits of paying into a pension
When working out how much you need to contribute to your pension, it’s important to remember that pensions have fantastic tax benefits that provide a boost to any contributions you make. You will automatically receive tax relief if:
- Pension contributions are taken directly from your salary by your employer before income tax is deducted, or
- Basic pension tax relief of 20% is claimed back by your pension provider from the government. This is added into your pension and known as relief at source
If you are a higher rate taxpayer, you can claim back full tax relief via your self-assessment tax return, or through your employer’s payroll by contacting HMRC who will amend your tax code.
Also, if you are paying into a workplace pension, your employer may match your contributions up to a certain limit. It's worth checking the terms of the plan to see if any increase in your own payments will lead to additional benefits from your company.
We can help you work out how much you should be paying into your pension as part of your retirement planning. By taking all aspects of your life, finances and current pension into consideration, we can give you the confidence to make informed decisions about your pension contributions.
Calculate my pension
At Evelyn Partners, we can help you calculate your pension along with your retirement income as a whole. This will account for your:
- Level of pension contributions
- Current pension value
- Other savings and investments (including property) and their current value
Our calculations can help you to make realistic assumptions and informed decisions for your future.
Remember, all investments go down and up, and tax rates and relief depend on individual circumstances and are subject to change. This will affect what you get back.
While we can assist with your personal and workplace pensions, you can review your state pension forecast by visiting the Government website.
What age can I retire?
The current state pension age in the UK is 66, rising to 67 in 2028. By 2046, it is set to increase to 68.
You can access most other pensions from the age of 55 (rising to 57 in 2028). This is known as the normal minimum pension age (NMPA). There are certain schemes that can be accessed before the age of 55 so it’s important to check with your provider if you have a protected early pension age.
Many people choose to retire after the normal minimum pension age, and sometimes after they reach the state pension age. This can be for various reasons, including not wanting to give up work or because they cannot afford retirement yet.
There are, however, others who want to retire as soon as they can, but at the same time, do not want to run out of money in later life. With the help of cashflow modelling and our expertise, we can work out what age you can retire with a high degree of accuracy. Taking your individual circumstances into account, we can see if you are on track to achieve the retirement you want and how old you will be when you arrive at this point. With changes to pension legislation and the removal of the pension lifetime allowance charge, this could be earlier than you think.
Saving for retirement
Saving for retirement is often one of life’s most significant financial challenges. Our experts can give you advice in a number of areas to help with this, including:
Taking a retirement income
Retirement is no longer about simply saving into a pension and buying an annuity. After you reach age 55 (increasing to 57 in 2028), you can take a retirement income in a way that suits your requirements while making the most of your various tax allowances. This could include taking pension lump sums, buying an annuity, going into income drawdown, selling parts of your investment portfolio and taking income from ISAs, dividends and cash savings. We can show you how long your money should last and how much you can afford to spend each year.
Your investments as an income in retirement
If you will be relying on investments held in your pension or other accounts for an income in retirement, it is important that your money works hard for you. Our investment managers can make sure that it is, either by managing your investments for you or giving you advice on all your investment decisions.
They can also review your portfolio over time, ensuring it continues to reflect your needs and circumstances. This could be by reducing your level of investment risk as you get nearer to retirement or switching the focus of your portfolio to generating an income when you retire.
The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
Frequently asked questions about pensions and retirement
What are the tax benefits of pensions?
Investments in pensions grow free from income tax and capital gains tax. Pension contributions are paid from gross (pre-tax) income. Where tax has already been paid on a pension contribution it is refunded. The tax office will automatically top up pension contributions up to your annual allowance by 20% to cover basic rate tax. Higher or additional-rate tax payers can then claim back any higher or additional-rate tax that they have paid on contributions through their tax return.
What is the difference between a defined contribution and defined benefit pension?
A defined benefit pension (also known as a final salary pension) is usually set up by your employer. It guarantees you a regular income in retirement, usually based on your salary and the number of years you have worked. The level of income may also increase in line with inflation.
On the other hand, defined contribution pensions do not offer you a guaranteed level of income. The amount of money you will have in retirement depends on how much you and/or your employer has contributed and how well your pension investments have performed.
What is the difference between the annual allowance, the lifetime allowance and the tapered annual allowance?
The annual allowance is the maximum amount of pension contributions (personal, employer and third party) that can make each tax year into your pension before incurring an annual allowance charge. You would be subject to a tax charge (the annual allowance charge) if your pension contributions exceed your available annual allowance for a tax year. The standard annual allowance is currently £60,000. Each year, you can personally contribute up to 100% of your relevant UK earnings into a pension or the annual allowance (whichever is lower) and receive tax relief.
The pension lifetime allowance charge was a previously imposed limit on the amount of pension benefits you could build up during your lifetime before incurring a tax charge. Your pension was previously assessed against the allowance when you took benefits, died or reach age 75. Any excess was taxed at 25% on top of income tax if it was taken as income, or 55% if it was taken as a lump sum.
The lifetime allowance charge has since been removed (the allowance itself of £1.0731 million will remain in place until April 2024), leading to some people opting back into a pension scheme, making additional personal pension contributions, or even taking early retirement.
The tapered annual allowance applied to people with an adjusted annual income of £260,000 or more. Adjusted income includes income from all sources, plus any employer contributions made on your behalf. The usual £60,000 annual pension allowance is reduced by £1 for every £2 of income above £260,000, down to a minimum of £10,000.
What is pension carry forward?
Pension carry forward lets you pay more than your annual allowance into your pension by ‘carrying forward’ any unused allowance from the previous three tax years (as long as you have sufficient earnings). You will still receive tax relief on the payments and it can be useful for those affected by the tapered allowance.
What happens to a pension when you die?
A defined contribution pension can be passed on to anyone you choose via a nomination of beneficiary (also known as an expression of wish). If you die before the age of 75 the pension will be passed on tax-free, but lump sums above the pension lifetime allowance will be taxable at your beneficiaries' highest marginal rate of tax. If you die after 75, your beneficiaries will pay their usual rate of income tax on any money taken from the pension.
A defined benefit (final salary) pension will usually stop paying an income when you or, if your pension income passes onto a dependant, your dependant dies. The benefits from a final salary scheme can only be paid to your husband, wife, civil partner or dependant child under the age of 23 (unless they are dependent on you because of a disability).
Are pensions liable to inheritance tax?
Pensions do not usually form part of your estate so they are not charged with inheritance tax when you die. However, any income or lump sum death benefits paid from your pension may form part of your estate and therefore be liable to tax.
Passing on a pension has become a popular estate planning tool for this reason. In some cases, when you retire, your pension is the last thing you should touch as it might be more tax-efficient to draw on your assets which are liable to inheritance tax first, so that you can leave behind more in your pension to your beneficiaries.
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