With the basic state pensions for a married couple set at just £185.45 a week for 2015/16, someone earning £50,000 faces a drop in income of more than 80%* if they do not have any additional provision, such as a personal or occupational pension.

This makes personal pension planning essential for just about everyone.

* Most people will also be entitled to some form of second state pension, though a flat-rate state pension scheme starts in April 2016.

What you can save

Fortunately, rules introduced in 2006 mean that almost anybody in the UK can invest up to £2,880 a year into a pension plan and have it ‘topped up’ to £3,600 a year by the government.

What is more, you can make additional pension contributions up to your entire earnings from trade profession or employment, provided you do not exceed the annual allowance, set at £40,000 for 2015/16 (with some carry forward provision)after a series of reductions.

In fact if you have an employer, they can put in up to the annual allowance (less any contributions you may make) even if this is more than your earnings (subject to satisfying HM Revenue and Customs that your total remuneration package is justified). Most employers are now required to ‘auto-enrol’ most or all of the workforce into a qualifying pension plan and also contribute to it alongside them. An employee may opt out, but then loses the employer’s contribution as well as tax relief on their own, almost always making opt out unwise.

More pensions freedom
New pensions freedom announced in the 2014 Budget and mainly implemented in April 2015 mean that, when you come to retire, your fund* can be used to:

  • Provide a tax-free amount, or multiple smaller amounts, of up to 25% of your fund;

The balance may be used to:

  • Purchase an annuity from an insurance company (not necessarily the one you have built up your fund with); or
  • Draw an income directly from the fund of whatever amounts you choose, subject to taxation as income in the tax year in which it is drawn. Previous restrictions on drawdown pensions have been relaxed, so this option, or a combination of drawdown and annuity, has become viable for many more people. It is important to get professional advice on the decisions you make.

*Your fund should not exceed the lifetime allowance, set at £1.25 million for 2015/16 and falling to £1 million in 2016/17, or a tax charge will normally apply – ask us about HMRC protection from the impact of lifetime allowance cuts.

Pension benefits may be taken from age 55, which may be about ten years before your state pension becomes payable. The new pensions freedom does not apply to defined benefit (e.g. final salary) pensions, which may however have other advantages. It may be possible, if so advised, to transfer from a final salary pension to one that does qualify for the freedoms, though not from an unfunded public sector final salary scheme.

If you die …

… before benefits are taken, the entire fund can be returned to your estate, paid to a nominated beneficiary or used to provide benefits for a dependant.
… after benefits have started to be drawn as an annuity, the income can continue if you have asked for a joint life or capital protected income, otherwise it ceases.
… after an income has started to be drawn directly from the fund but before you reach 75, subject to the lifetime allowance, benefits are paid to beneficiaries free of tax.
… after you reach 75, tax is levied at 45% if the whole fund is disbursed before 6 April 2016, but thereafter the beneficiary’s marginal rate of income tax applies.

If you are considering a pension switch or transfer out from an occupational scheme you should always seek independent financial advice before taking any action. Any decisions made and action taken in respect of retirement planning are usually irrevocable and therefore can have a massive impact on your retirement now and in the future if they turn out not to be suitable.

The value of investments is not guaranteed and will fluctuate. You may get back less than you invest.

Self-invested pensions

We can advise on all aspects of self-invested pensions including Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs).

For more details, please contact us.