Category: Annuities

10 good reasons to pay into a pension before April

There are less than three months to go before the new pension freedom becomes reality. With the legislation now in place, the run up to April is time to start planning in earnest to ensure you make the most of your pension savings.

To help, here are 10 reasons why you may wish to boost your pension pots before the tax year end.

1. Immediate access to savings for the over 55s

The new flexibility from April will mean that those over 55 will have the same access to their pension savings as they do to any other investments. And with the combination of tax relief and tax free cash, pensions will outperform ISAs on a like for like basis for the vast majority of savers. So people at or over this age should consider maximising their pension contributions ahead of saving through other investments.

2. Boost SIPP funds now before accessing the new flexibility

Anyone looking to take advantage of the new income flexibility may want to consider boosting their fund before April. Anyone accessing the new flexibility from the 6 April will find their annual allowance slashed to £10,000.
But remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility. Anyone in capped drawdown before April, or who only takes their tax free cash after April, will retain a £40,000 annual allowance.

3. IHT sheltering

The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no IHT payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.
You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you are not in serious ill-health at the time, any savings will be immediately outside your estate, with no need to wait 7 years to be free of IHT.

4. Get personal tax relief at top rates

For those who are higher or additional rate tax payers this year, but are uncertain of their income levels next year, a pension contribution now will secure tax relief at their higher marginal rates.

Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next. Flexing the carry forward and PIP rules* gives scope for some to pay up to £230,000 tax efficiently in 2014/15.
For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.

* Contact me if you don’t know what this is.

5. Pay employer contributions before corporation tax relief drops further

Corporation tax rates are set to fall to 20% in 2015. Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest. For the current financial year, the main rate is 21%. This drops to 20% for the financial year starting 1st April 2015.

6. Don’t miss out on £50,000 allowances from 2011/12 & 2012/13

Carry forward for 2011/12 & 2012/13 will still be based on a £50,000 allowance. But as each year passes, the £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And don’t ignore the risk of further cuts.

7. Use next year’s allowance now

Some may be willing and able to pay more than their 2014/15 allowance in the current tax year – even after using up all their unused allowance from the three carry forward years. To achieve this, they can maximise payments against their 2014/15 annual allowance, close their 14/15 PIP early, and pay an extra £40,000 in this tax year (in respect of the 2015/16 PIP). This might be good advice for a individuals with particularly high income for 2014/15 who want to make the biggest contribution they can with 45% tax relief. Or perhaps the payment could come from a company who has had a particularly good year and wants to reward directors and senior employees, reducing their corporation tax bill.

8. Recover personal allowances

Pension contributions reduce an individual’s taxable income. So they’re a great way to reinstate the personal allowance. For a higher rate taxpayer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.

9. Avoid the child benefit tax charge

An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other. The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved can lead to effective rates of tax relief as high as 64% for a family with three children.

10. Sacrifice bonus for employer pension contribution

March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the employee’s taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.

The press was full of ‘pension bank account’ stories in October. Will it be that simple?

The Taxation of Pensions Bill, which will put most of the Budget 2014 pension changes into law, was published in mid-October. It contained few surprises, not least because it had been issued in draft in August, along with detailed explanatory notes. Nevertheless, the Treasury pumped out a press release and the media duly splashed the (old) news.

The emphasis in the press coverage was, to quote the Treasury release “Under the new tax rules, individuals will have the flexibility of taking a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate, without having to enter into a drawdown policy.” It was this reform which prompted the talk of using pensions as bank accounts. However, things may not be quite that simple in practice:

• The new rules do not apply to final salary pension schemes, which may only provide a scheme pension and a pension commencement lump sum.

• It is already possible to make this type of 25% tax free/75% taxable withdrawal under the flexible drawdown provisions introduced in 2011. This has not proved very popular.

• The new rules are meant to come into effect on 6 April 2015, but they are not mandatory, so some pension providers may choose not to offer them. It seems likely that many occupational money purchase schemes will avoid any changes, as they were never designed to make payments out – that was the job of the annuity provider. Similarly many insurance companies may not be willing to offer flexibility on older generations of pension plan – just as some do not currently offer drawdown.

• The short timescale has been criticised by the pensions industry. Systems and administrative changes can only be finalised once the Bill has become law and that will be perilously close to April, making it difficult for providers to bring in the changes from day one.

• If you are able to take a large lump from your pension, the tax consequences could be most unwelcome. For example, drawing out £100,000 would mean adding £75,000 to your taxable income – enough to guarantee you pay at least some higher rate tax, regardless of your income, and quite possibly sufficient to mean the loss of all or part of your personal allowance. No wonder the Treasury expects to increase tax revenue as a result of the reforms.

• Ironically another of the pension reforms, reducing the tax on lump sum death benefits, could mean you are best advised to leave your pension untouched and draw monies from elsewhere.

The new pension tax regime will present many opportunities and pitfalls, not all of which are immediately apparent. Do make sure you ask for our advice before taking any action.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Tips to Maximise Your Retirement Savings

Use these best practices to build a secure retirement plan.

Saving Early.
By beginning your retirement saving at an early age, you allow more time for your money to grow. As gains each year build on the prior year’s, it’s important to understand the power of compounding and take advantage of the opportunity to help your money grow.

Set realistic goals.
Review your current situation and establish retirement expenses based on your needs.

Focus on Asset Allocation.
Build a portfolio with proper allocation of stocks and bonds, as it will have a huge impact on long-term goals.

For the best long-term growth, choose stocks.
Over long periods, stocks have the best chance of attracting high returns.

Don’t overweight a portfolio in bonds.
Even in retirement, do not move heavy into bonds. Many retirees tend to make this move for the income, however, in the long-term, inflation can eliminate the purchasing power of bond’s interest payments.

If in doubt, see a properly qualified independent financial adviser who can help you put together a plan to achieve your financial goals and implement the necessary arrangements to put it into effect.

Shop Around when you retire

BBC Breakfast on Saturday 21st June featured a piece on the importance of shopping around to ensure that you get the highest possible income when you retire.

This applies to those of you with private investment linked pensions. These operate on the basis that you make contributions during your working life to create a pot which you use to support yourself in retirement. At that point, you can typically take 25% as a tax free cash sum and the rest must be used to provide an income in one of a variety of ways. For most people of relatively modest means the most appropriate option is likely to be an annuity.

Annuities come in all sorts of shapes and sizes. They can be paid monthly, quarterly, half yearly and yearly, in advance or arrears. Payments in arrears tend to be greater than in advance. For example a pension yearly in arrears will be better than a pension monthly in advance. They can be level or escalating and can include various levels of provision for spouses and dependents. They can also include a degree of capital protection so that the fund is not all lost should you die shortly after retiring. Enhanced annuity rates are available to smokers as well as to people in poor health.

A key aspect of annuities is that once you have made your choice and the annuity has been put into force, you cannot change your mind. It is therefore critically important that you carefully consider your requirements – and those of your dependents- before you commit yourself. If you suspect that your health may qualify you for a better rate check out enhanced rates.

The Financial Services Authority, the body which regulates the financial services industry, has produced a useful booklet which summarises your choices on retirement. You can access it here

The thrust of the BBC piece was that a large number of people do not appreciate that when they retire they do not need to buy an annuity from the company with which they built up the pension fund. All pension providers are required to offer what is known as the ‘Open Market Option’, which is the facility to take the fund to another company where an improved annuity can be provided. As a consequence they are losing a substantial amount of money.

The importance of checking out the Open Market Option cannot be overstated. Most pension companies do not offer good annuity rates. Prior to retirement they issue a pack of information containing a range of options and this will mention the open market option. However too many people ignore this to their cost.

So how do you find out more about the Open Market Option? See an independent financial adviser. They will not only be able to shop around for you but they will also be able to advise you on which on the other benefits you should include such as a spouses/dependents pension, escalation etc. They will also be able to liaise with the various companies involved to ensure that your pension comes into payment with a minimum of delay.

As a practitioner I can assure you that this is not merely a theoretical exercise. Barely a month goes by when I don’t help someone shop around for the best rates. Most recently this has resulted in a pensioner increasing their income by some £3000 per year.



Chris Wicks CFP
I help you achieve your lifetime goals for reasons that are important to you