If you do not want to be solely reliant on the State Pension in retirement, (and there may be moves to make access to this extended to age 70), then you MUST save into a workplace or personal pension.
Workplace pensions are now mandatory under Govt. Pension Auto Enrolment rules and the value of these is dependent on the generosity of the Company that you work for.
Personal Pensions may enable you to build up a retirement pot that should be able to give you an income that means a comfortable retirement.
Workplace Employee or Personal contributions attract tax relief from HMRC. The tax relief is calculated on the Gross contribution and 20% tax relief is contributed by HMRC 6/7 weeks after your contribution has been made.
E.g. You contribute £120 this has the HMRC gross contribution of £30 add and is ‘grossed up’ to £150. You can see that 20% of gross is actually 25% of your contribution.
High Rate(HRT, 40%) and Additional Rate (ART, 45%) tax payers, can reclaim the extra 20% or 25% Gross contribution through their self assessment submission.
So, for a HRT contributing £300, the eventual ‘grossed up figure’ is £500, an additional FREE, HMRC contribution of £200 and this, as a percentage of the contribution of £300, is equal to 66.66%. For an ART the numbers are; Contribution £300, Grossed up figure £545.45, FREE, HMRC Contribution of £245.45, percentage of your contribution is 81.81%.
The HMRC contribution rules are that you can contribute a maximum of £40,000 gross per year (there are some limitations to this) or up to your earned income, whichever is higher.
If you are a very low paid or have no earned income HMRC allows you to contribute £3,600 gross, £2,880 net, each tax year. As soon as you are born, you are classified as a ‘tax payer’. Pension contributions can also come from 3rd parties, so a Parent or Grandparent could start a pension as a ‘birth gift’.
Of course for the HRT and ART tax relief to work, when the tax relief is paid in the tax year following the initial contribution, it MUST be then paid into the Pension. The idea is to have HRT or ART tax relief whilst working and only pay 20% tax when in retirement.
The eventual pension pot has a benefit option of taking 25% of the value as a tax free Pension Commencement Lump Sum(PCLS) after you reach the age of 55.
The pension PCLS can be taken in ‘tranches’ of varying amounts and when taken, if you are in the appropriate sort of plan, you do not have to also take an income.
The other major points, are that if in an appropriate pension, a) if you die before age 75, you can leave the pot to anybody you choose, tax free, b) if you die over age 75, you can leave the pot to anybody you choose but they will pay tax at whatever their marginal rate is, c) the beneficiary can take the pot as a lump sum or as an income (tax to be considered here) and d) the pot will be outside of the calculation for Inheritance Tax (IHT).
The ‘Expression of Wish’ form is important in attaining the above benefit.
Monthly / Annually - Frequency of payment
Advance / Arrears - When payment made i.e. if you select annually in arrears the first income payment will be made one year after purchase of annuity.
Single Life - Annuities may be purchased for payment during the lifetime of the owner of the pension and this is known as single life and income is finished on the owner’s death.
Joint Life - The annuity can be purchased to continue to be paid to a spouse/dependant after the pensions owner’s death and this is known as joint life. A joint life pension can continue on the same level as that paid to the pension owner or it can reduce to 2/3, 1/2 or 1/3.
Guarantee - An annuity is designed to cease on death. However, you may purchase a guarantee for 5 or 10 years. This guarantees that payments will continue for the first 5 or 10 years regardless of the owner dying earlier than this.
Level Payment - The annuity will remain paid at the original amount for life.
Escalation - If purchased, the annuity will increase annually at a predetermined rate. This may be 3% pa, 5% pa, or linked to increases in the Retail Price Index (RPI)
Open Market Option (OMO) - You do not have to take the annuity from the current pension provider. You, or your Independent Financial Adviser, are able to search the annuity market for the best income payment.
Enhanced Annuity - If you are a long-term smoker or have an illness, then you may be able to get an increased annuity payment. (There is a reason for this in that they are expecting you to die sooner rather than later)
The more benefit options that are selected, the lower the initial annuity payment may be.
EJ FINANCIAL LTD
2nd Floor • Johnsons Building • The Broadway • Crowborough • East Sussex • TN6 1DE
01892 234884 • 020 3657 9079 • 01635 777795
EJ Financial Ltd. Registered in England and Wales No 9370740
Authorised and regulated by the Financial Conduct Authority. We are entered on the Financial Services Register No 670594 at www.fsa.gov.uk/register.
The Financial Conduct Authority does not regulate taxation and trust advice.
The value of your investment can go down as well as up and you may get back less than you have invested.
The information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
NOTE: None of the above constitutes advice, always consult a professional adviser before making any investment decisions.
Please talk to Ted on 01892 234884 or 01635 777795 for further information.
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