Retirement Planning - Time for a Health Check?
Pensions underwent the most far reaching changes in modern times in 2014 which mean that pension savers now have significantly better flexibility and control. The changes have been very positive but it can also seem overwhelming with such a wealth of opportunities.
Now, more than ever, we feel careful planning is needed when building your fund to make the most of the tax benefits available. In turn, when it comes to accessing your pension savings, the same care is needed to keep tax liabilities to a minimum and to make the most of the funds available.
For all of us, a pension health check is a worthwhile process and the changes have put some new items on the “to do” list. Below are a few key things to consider:
Know what pensions you hold
Keep a pensions folder or, for the more technologically inclined, a spreadsheet. Stay in contact with older pensions which often fall between the cracks when people change jobs or move home. There is a free service to trace pensions: www.gov.uk/find-lost-pension
Make the most of tax relief
The Government provides tax relief on pension contributions to encourage us all to save for our retirement. If you are a UK taxpayer, in 2016/2017 you can contribute up to 100% of your earnings or the maximum £40,000 “Annual Allowance”, whichever is lower and receive income tax relief at your highest marginal rate. For example:
Paul earns £45,000 salary and makes a £5,000 pension contribution. When he makes this investment, the Government will add £1,250 tax relief (20% income tax rate) directly to his pension. Therefore, to get £6,250 into his pension savings, it only costs Paul £5,000. Additional tax relief is available for people paying 40% or 45% income tax and for people in certain income brackets i.e. above £100,000, there is the potential to achieve up to the equivalent of 60% tax relief on pension contributions.
In the Summer 2015 Budget, it was announced that from April 2016 the £40,000 annual allowance will be tapered for individuals with an “adjusted income” of £150,000 or more. We are happy to provide further information and advice on this area if you are affected.
If you are employed you may have already been told about what your employer has put in place and if not, you will do in the near future as workplace pensions will be offered by all employers by 2018. Your employer may match some of what you contribute which is clearly a valuable benefit.
Should you have one pension or several different pots
For some people, it is very worthwhile to tidy up their pensions into one plan – for others, they might lose valuable benefits by taking this step. It is not for everyone but taking professional advice to look at your position is essential and could be very beneficial.
Look at how your pension is performing
Pension statements often make it difficult to see the important information at first glance. A simple calculation using the information from the statement can help you identify whether the pension has achieved any growth in the last twelve months, for example:
£50,000 Current Value
£1,200 Contributions Paid in the period
£46,000 Value last year
Everyone will have their own perspective of what growth is a little or a lot and there are a number of underlying reasons for the level of growth you see and that context is an important indicator of how healthy your pension fund is:
It has made a lot; this could be due to the fund having made good investments and taking growth opportunities or equally, it could be the fund has taken a lot of risk to make this growth and others have achieved the same and taken less risk to do so.
It has made a little; it could be that the fund has been cautious and defensive and is beating inflation in a flat or falling market or that the fund has little diversification and the areas where it is investing are not showing growth.
It made a loss; this could be due to the fund being defensive in a falling market and losing less than others or it could be due to missing opportunities for growth.
In any of these scenarios the way markets move in relation to your funds is a key factor. Part of our expertise is in analysing the context of performance and taking action in the right circumstances to keep pensions on track and meeting your expectations.
Plan what happens to your pension if you were to die
It is essential to have a Will in place that reflects your wishes. Your pension is often your largest asset aside from your home and it is just as important to choose who should receive your pension if you were to die, called a “nomination”. Whether in the saving stage or if you are in retirement, you can nominate who you would like to receive pension benefits and a nomination can be made and updated at any time with a simple form from the pension provider. The new rules brought new opportunities in this area which mean that anyone with an existing pension should review their nominations.
Think ahead about what you want your retirement to look like
Pensions are only part of most people’s plans for funding retirement. You may have a rental property, the potential proceeds from a business, ISAs and other investments and savings. It is the culmination of all these elements which make up life after work and it varies greatly between individuals but the key questions remain the same. How much you want to comfortably retire, where is it going to come from and when. All three questions are harder than they first seem but once you know what you want and when you would like it, you can focus on where it is going to come from whether there enough. If there is, it needs looking after and protecting for the future. If there is not, it is a choice between making further plans or pushing back the date when you would like it. Plans change over the years but the fear of not having enough can be easily be replaced with the knowledge of what you have, where you want to be and how you can get there.
We offer all new clients a free initial meeting at any of our eight regional offices to discuss your position and plans. Please contact us on 0330 102 5555 or by email to email@example.com to arrange an appointment to see one of our Independent Financial Planners.
1st August 2016 – Opportunity to protect your pension savings from the April 2016 drop in the Lifetime allowance.
31st January 2017 – self assessment deadline. Pension contributions could reduce your liability and payment due.
5th April 2017 – Tax year end deadline for pension contributions.