7 November 2017

The important questions about your pension

Stephen Parker and Alison Fitzsimons of Tilney provide answers to some of the most common pension questions asked by their clients.

The Government’s proposals to simplify pensions have provided people with more freedom and choice, but ironically, retirement planning could be seen as more complicated than it was previously. This has resulted in many people choosing to take specialist financial advice in this area.

Here, Tilney answer some of the questions their financial planners are frequently asked by clients about pensions.

Q. How much money do I need to fund my retirement?

This is one of the most common questions we are asked. The answer is different for everyone – the amount you need will depend on your retirement goals, your current employment circumstances and how much money you have in other savings and investments.

Tilney use cashflow modelling to see what your finances could look like and whether you will have enough money in the future. This will show your future requirements alongside any increase or decrease in your pension, as well as any other assets, helping to identify any potential surplus or shortfall.

Q. If it looks like I need to increase my pension contributions, what’s the maximum amount I can contribute?

At the time of writing, the annual allowance for tax relief on pension contributions is £40,000.

If you earn more than £150,000, the allowance reduces by £1 for every £2 earned above this, with the allowance tapering down from a maximum of £40,000 to a minimum of £10,000.

Additionally, carry forward of any unused pension allowance in the last three years could be utilised if certain conditions are met. This could potentially allow an additional pension contribution of up to £120,000. However, the rules here are complex so it is advisable to seek professional advice.

Q. Can I use other assets to help fund my retirement?

Absolutely. You may not want to access your pension immediately if you’re taking a gradual retirement, or you might need to top up your pension income to meet your financial goals, so you can take an income from other investments such as dividend-paying shares, bonds and property.

Q. What options are available when I want to start taking an income from my pension?

When you begin taking an income from your pension, you will be presented with various options and it’s important to consider which one is right for you:

  • Annuities – you can use your pension pot to purchase an annuity, which will provide a fixed, life-long income. Although buying an annuity was once the norm, their popularity has declined. That being said, annuities still have a place in retirement planning, especially for people looking for a guaranteed, lifetime income.
  • Flexi-access drawdown – this allows you to take a regular income that can be varied annually. The first 25% can be taken tax-free.
  • Uncrystallised Funds Pension Lump Sums (UFPLS) – this allows you to take out ad hoc sums of money from your pension. The first 25% of the withdrawal is tax-free but the remaining balance (75%) is taxable.

Q. Does my existing pension allow me to take advantage of the new flexibilities?

Although some pension schemes offer these flexibilities, not all of them do as a matter of course. Unfortunately, pension providers are not obligated to implement the new legislation on any existing plans. It’s worth reviewing such plans with a financial planner as it might be the case that a transfer out is more suitable for you.

Q. Is the reduced £1 million lifetime allowance relevant to me?

While the idea of having pension savings valued at £1 million sounds a lot, in reality many people can reach and go over this figure without even realising. Final salary benefits, long-term savings and investments, combined with smaller pensions that you might have forgotten you even had, can take you over the capped lifetime allowance of £1 million.

Q. When I die, can I pass my pension on tax free?

As they don’t form a part of your estate when you die, pensions are free from Inheritance Tax. Following the removal of pension death tax in 2015, pensions are now a useful vehicle for passing on an inheritance tax-efficiently.

It should be noted that if you die before age 75, there will be no tax to pay on the pension policy you are passing on. If however you are over age 75, the beneficiary will pay income tax on any benefits that they take from the inherited plan, albeit at their marginal rate

We hope that you’ve found this article helpful and informative. If you have any further questions or would like to arrange a no-obligation, initial consultation with Tilney’s retirement experts, please contact them on 0333 014 5429 or email alison.fitzsimons@tilney.co.uk.

The value of an investment may go down as well as up, and you may get back less than you originally invested.

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.

Please note we do not provide tax advice. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Issued by Tilney Financial Planning Limited, which is authorised and regulated by the Financial Conduct Authority. Financial services are provided by Tilney Financial Planning Limited, Tilney Investment Management Services Limited and other companies in the Tilney Group, further details of which are available at www.tilney.co.uk. © Tilney Group Ltd 2017.

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