Retirement Planning

Retirement Planning

Looking to the future

Sound planning could be the key to enjoying a fruitful retirement. After many years of hard work and saving, it is crucial to take an appropriate approach with an aim of maximising your potential retirement income.

Following the Pension Reforms announced in the 2014 budget, there are more options than ever for managing your workplace or personal pension. However, it can be tricky to navigate through the new landscape.

Our Private Banking and Advice Managers can help you put together a retirement plan that is in-line with your financial situation and your personal attitudes.


Pension changes

With the 2014 Budget pension changes, there are more options than ever for managing your workplace or personal pension. However, it can be tricky to navigate through the new landscape.

> Find out more about pension changes

 

Retirement planning

There are a number of considerations to take into account in order for you to maintain your income during retirement. These could range from how you go about building up your personal pension savings to how you ultimately use the money. One of the first factors to consider is selecting the right type of pension for your needs.

You may want to build up funds invested with a pension provider or alternatively you may want to be more pro-active in managing your money and opt for a Self-Invested Personal Pension (SIPP), which allows you to make your own investment decisions.

Whether your goal is to increase the investment returns on your retirement savings or to create a stable income for your retirement, our Private Banking and Advice Managers can help make the best decision for you.

Accumulating wealth for retirement

When it comes to retirement planning, the first step is to begin saving money for your eventual retirement. The most common way this is done is through investing in a pension scheme. Although there are a number of different pension options, they are all designed with the same basic goal: providing the saver with an income in retirement in the most tax efficient manner.

State pension

The Government provides a state pension at retirement age subject to National Insurance contributions paid over your lifetime.

Workplace pensions

There are two main types of workplace pension scheme:

-Defined Benefit Pension: Sometimes known as final salary pensions, where an employer provides an employee with an income at retirement. Defined benefit schemes promise to pay a set amount of income to retirees based on how much they earned and how long they worked for the company.

-Defined Contribution Pension: Sometimes known as money purchase pensions, an employee, the employer, or both, makes regular contributions into a saving scheme. These payments are then invested by the pension provider and once you reach retirement age, you then have a number of options to draw on the funds.

Personal pension, stakeholder pension, self-investment personal pension (SIPP)

These are all types of defined contribution schemes. However, they have a number of things in common.

  • Your benefits will depend on the type of scheme, the investment return, the amount of money invested as well as the length of the investment.
  • Benefits are available in different ways, such as buying an annuity or drawing on a pension.
  • These schemes are flexible, transferable and all have tax advantages to incentivise pension savings.

Thanks to Government legislation, stakeholder pensions have a number of conditions designed to make them more available. For example, management charges cannot be more than 1.5% of the fund value for the first ten years and are only 1% after that. You can also stop and start payments when you wish or switch providers when it suits you.

What is a Self-Invested Personal Pension (SIPP)?

A SIPP gives you more flexibility and control over where you invest your funds. Traditional pension providers only offer limited options. SIPP providers allow savers to invest their money as they see fit, for example in unlisted shares or non- residential property. However, it’s worth noting that SIPPs may require a more hands-on approach.

Important information

Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change in the future.

Retirement choices

There are a number of decisions to make upon reaching retirement age; decisions such as should you drawdown an income from your pension pot as cash or purchase an annuity? With the Government pension reforms from April 2015, there are more options than ever and here are some of the main options below:

Lump sum cash withdrawal from your pension

If you have defined contribution pensions you can take out up to 25% of their total funds as a tax free lump sum, which could provide a large sum of money, with the remainder used for retirement income. However, you may need to rely on other sources of income or capital to fund desired retirement lifestyle.

Drawdown

Drawdown is a way of taking an income from the money you have built up in a defined contribution pension and using it to supplement earned income, if you move to semi-retirement, or provide all your income needs when you decide to fully retire. As capital and income can be drawn when required it can provide a good deal of flexibility and control over your finances in retirement allowing you to maximise your tax allowances and benefits and at times defer income if not needed.

With Drawdown, the funds are typically left invested until you need them and therefore this strategy is considered more risky than taking an annuity as the funds could run out in your lifetime. As a result you need to carefully assess your capacity and appetite for investment risk.

Purchasing an annuity

An annuity is a financial product that can be purchased using funds from a defined contribution pension. The income provided is agreed at the outset and the rate of return is calculated using a number of factors such as interest rates, age and health of the recipient, with the income usually then paid for life.

There may be more tax-efficient ways of utilising your wealth when you retire, especially if you have other assets which can also provide you with an income. It may make sense to keep your pension savings invested and to take an income from other available sources. Please contact us for further information on how to prepare your finances for your retirement.

Important information

Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change in the future.

Pension changes 2015

In 2014, Chancellor George Osborne announced some of the biggest changes to the pension system in the UK in over a hundred years. Traditionally, pension options have been relatively restrictive, aimed at safe-guarding the incomes of pensioners rather than giving them flexibility over how they manage their savings. One of the reasons is that with interest rates at record lows, returns on annuities have in the main been fairly low, resulting in pressure on the Government to make changes. The Pensions changes from April 2015 offer more freedom than ever before with a number of different options for retirees with defined contribution pension arrangements. Some of the major changes are outlined below. If you need advice or guidance on how the changes will impact your retirement savings we recommend you book an appointment to speak to one of our Private Banking and Advice Managers (PBAM).

Full withdrawals

Under the Budget 2014 pension changes, once you’re over the age of 55, you will be able to withdraw the entirety of your defined contribution pension as a lump sum if your Scheme permits it. Of this total, 25% will be tax-free, with the remainder taxed at your highest marginal rate.

Phased Withdrawal

Phased withdrawal means crystallising a portion of the pension, 25% of which is tax free and the remainder is taxed at the marginal rate of income tax and the remainder of the pension is left untouched to a future date.

Phased Flexi-Access Drawdown

Phased Flex-Access Drawdown means you crystallise a portion of the pension, but only withdraw the tax free element, leaving the taxable portion in the pension and therefore not liable to income tax until drawn at a future date. The remainder of the pension stays untouched.

Full Flexi Access drawdown

Full flexible drawdown means you crystallise the whole pension fund and withdraw the 25% tax free element leaving the remainder to be accessed at a later date with any later withdrawals liable to income tax at the marginal rate for the tax year in question.

Passing on your pension

In September 2014 the Treasury announced the new “pension death taxes” applicable from the 6th April 2015.

Where the pension holder dies before the age of 75 any unused defined contribution or flexi-access drawdown pension values that are within the Life Time Allowance can pass tax free to a dependant or nominated beneficiary.

If the pension holder dies after the age of 75 then unused defined contribution or flexi-access drawdown pension can be passed on to a dependant or nominated beneficiary with a taxable rate of 45% on lump sums. This is down from the previous rate of 55%. If taken as income, tax is paid at the marginal rate.

How do the reforms impact retirement planning?

Using your savings

You can use your annual tax efficient ISAs (Individual Savings Accounts) allowance, structured products, shares and bonds as a flexible way to build up your savings alongside a Pension. The pension reforms now provide a number of different ways that you can manage your pensions, making financial planning more complex. For example, you may stagger your withdrawals to gain tax benefits. Alternatively, you may combine using drawdown of some of your cash and use the remainder to buy an annuity.

Passing on your pension savings

As a result of the changes to Pension Regulations, a defined contribution pension scheme is now a more tax-efficient method of passing on wealth to family members or loved ones. This may impact how you plan for retirement. You may choose to draw income from other sources and leave your pension fund intact, knowing it can be passed on tax efficiently. The new reforms have made financial planning for retirement far more complex. Our Private Banking and Advice Managers are available to help you to:

  • Understand the implications of the reforms on your savings
  • Review your strategy to make sure it is the most beneficial for you in the new environment
  • Help you make adjustments if necessary.

Tax benefits for personal pension schemes

Tax benefits are offered by the Government on pension savings in order to encourage you to save for your retirement. Below are a summary of the main tax benefits available:

Contributions attract tax relief

When making a payment into your pension you are eligible for tax relief. Either your employer will take pension contributions out of your wages before deducting income tax, or, your pension provider can claim tax relief on your behalf at the current basic rate of 20% (remember tax rates can change). This amount is then added to your pension. You can also claim tax relief when someone else makes a personal contribution in to your pension.

If you pay tax at the higher rate of 40%, or at the additional rate of 45%, you can claim extra tax relief on your pension payments via your own tax return. The tax relief rate of 20% is topped up to meet your highest marginal rate. This effectively means that a £100 contribution could cost you as little as £60 if you are a higher rate payer or even £55 if you are an additional rate payer.

The annual allowance for tax relievable pension contributions for the 2014/15 and 2015/16 tax years is £40,000. However, an individual can carry forward any unused annual allowance from the three previous years. Therefore in theory in the 2015/16 tax year, on the basis that the individual was a member of a registered pension scheme but had made no pension contributions in the tax years 2012/13 through to 2015/16, so long as you had taxable net relevant earnings of the same level, you could make a single tax relievable contribution of up to £180,000.

If you are not earning enough to pay Income Tax, you can still get tax relief on pension contributions up to a maximum of £3,600 gross a year. This means the maximum you can pay in is £2,880 net and the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.

Once you have started investing in your pension, the growth will be tax efficient. This will potentially help grow your pension pot at a faster rate compared to alternate investments. However, your pension can go up and down depending on the assets it is invested in.

Pension Withdrawal

Under the new pension rules, once you’re over 55 (moving to age 57 in 2028) you will be able to access all of your funds at once in your defined contribution pension if the Scheme permits it. The first 25% of any withdrawal is tax free, with any remaining drawdown income taxed at your marginal rate.

Important information

Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change in the future.

Key retirement considerations

Timing withdrawals

  • If you withdraw your personal pension savings too early, you are likely to receive lower returns as the funds will have spent less time invested, or had less time to grow.
  • But, it is worth noting that withdrawing funds later does not always guarantee higher returns.

What are your capital requirements?

  • Some individuals withdraw pension funds, even though they do not “need” to. This can result in the money being kept in a less tax-efficient environment.
  • Withdrawing income on a staggered basis can be extremely tax efficient if done the right way.

What are your income requirements?

Balancing your income requirements is a crucial part of retirement planning. Things to consider include:

  • Your potential earning power throughout retirement
  • Possible additional income needs, such as for long-term care
  • Income preferences, some people may prefer a lower income if it is more stable

Working out your income needs is important, so you can aim to adopt the right strategy at the right time. Generating income surplus to your requirements can be inefficient in regards to tax.

Approach and risk

  • It is important to pick the approach that suits your needs and personality.
  • Some savers prefer a more high-risk approach with the potential of making larger gains.
  • Others prefer taking a low-risk approach and are willing to accept a lower income as a result.

You also need to ask yourself some of the following questions:

  • How much money will I need to live comfortably in retirement and for the rest of my life?
  • Could there be factors in the future which could cause my capital needs to change?
  • Will my retirement plans allow me to leave an inheritance or financial legacy?
  • How much money would my partner/spouse need to live comfortably if I die before them?
  • Could inflation affect my retirement savings and, if so, how can I protect against this?

Important information

Past performance is not a guide to future performance. Investors may not receive back the full amount originally invested and the value of investments and the income from them may fall as well as rise. Tax treatment depends on individual circumstances and may be subject to change in the future.

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