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Retirement planning strategies
With many individuals continuing to face a pension income
shortfall, it is essential to ensure that you put aside sufficient
funds during your working life to allow for a comfortable
retirement in the future. You could spend a third of your life as a
retired person, and by taking action now, you can help to make
this period as financially secure as possible.
When it comes to using the money you have saved for your
retirement, there is now much more choice available, and it
is important to take the appropriate advice on the options
available to you. Here we outline some of the key areas to
consider when planning for your ‘golden years’.
Initial considerations
Your retirement planning strategy will be determined by a
number of factors, including your age and the number of years
before retirement. However, there are some other key issues
to consider:
• Do you have an employer pension scheme?
• Are you self-employed?
• How much can you invest for your retirement?
• How much State Pension will you receive?
Individuals who reached State Pension age after 5 April 2016
receive a flat-rate pension, worth £164.35 per week where they
have at least 35 years of national insurance contributions or
credits.
Those who reached State Pension age before 6 April 2016 will
continue to claim their basic State Pension (plus any additional
state pension that they may be entitled to). The basic State
Pension in 2018/19 is £125.95 a week.
To receive a State Pension forecast you can phone the Future
Pension Centre on 0800 731 0175.
Employer pension schemes
There are two kinds of employer pension scheme, into which
you and your employer may make contributions. A defined
benefit scheme pays a retirement income related to the amount
of your earnings, while a defined contribution scheme instead
reflects the amount invested and the underlying investment
fund performance. In both cases, you will have access to
tax-free cash as well as to the actual pension.
The impact of the stock market downturn in the 2000s was
one key factor that resulted in many final salary schemes being
underfunded and a decision was taken by many firms to close
such defined benefit schemes. Many experts consider that this
type of scheme will cease to exist over the next few years.
The amount of personal contributions that can qualify for tax
relief is limited to the greater of £3,600 and total UK relevant
earnings, subject to scheme rules.
Pensions auto-enrolment
In order to encourage more people to save for their retirement,
the government has been gradually phasing in compulsory
workplace pensions for eligible workers. Under the scheme, all
employers must automatically enrol all eligible workers into a
qualifying pension scheme. There will ultimately be a minimum
overall contribution rate of 8% of each employee’s qualifying
earnings, of which at least 3% must come from the employer.
The balance is made up of employees’ contributions and
associated tax relief.
Personal pension schemes
Relying on the State Pension will not be adequate for a
comfortable retirement, so if you are not in a good employer
scheme, you should make your own arrangements.
To qualify for income tax relief, investments in personal pensions
are limited to the greater of £3,600 and the amount of your UK
relevant earnings, but subject also to the annual allowance. The
annual allowance is £40,000 but this is tapered for individuals
who have both income over £110,000 and adjusted annual
income (their income plus their own and employer’s pension
contributions) over £150,000. For every £2 of adjusted income
over £150,000, an individual’s annual allowance will be reduced
by £1, down to a minimum of £10,000.
Where pension savings in any of the last three years’ pension
input periods (PIPs) were less than the annual allowance, the
‘unused relief’ is brought forward, but you must have been a
pension scheme member during a tax year to bring forward
unused relief from that year. The unused relief for any particular
year must be used within three years.
Case Study
Alex has not made any contribution into his pension policy so
far in 2018/19.
Alex has unused annual allowances of £30,000 from 2015/16,
£5,000 from 2016/17 and £20,000 from 2017/18 (total
£55,000). Alex’s income is less than £110,000.
Alex’s maximum pension investment is therefore set at
£95,000 (£40,000 plus £55,000) for his 2018/19 PIP. He
needs to make a pension contribution of £70,000 (current
year allowance £40,000 and £30,000 unused relief from
2015/16) in order to avoid the loss of the relief brought
forward from 2015/16.
If contributions are paid in excess of the annual allowance, a
charge – the annual allowance charge – is payable. The effect
of the annual allowance charge is to claw back all tax relief
on premiums in excess of the maximum. Where the charge
exceeds £2,000, arrangements can be made for the charge to
be paid by the pension trustees and recovered by adjustment to
policy benefits.