September is #pensionsawareness month and, over the years, pensions have had their fair share of bad press. Here at Ovation we believe they are the best option they’ve ever been. We thought we’d remind you of the top reasons why pensions are a great choice in the right circumstances.
That’s right, HMRC gives, you an upfront bonus. They will give you tax relief up to your highest marginal rate of income tax, on the lesser of £32,000 or your relevant UK earnings. Even if you don’t have any income you can still contribute £2,880 and benefit from 20% tax relief. Given that higher earners begin to lose their tax-free personal allowance once their income reaches £100,000, this is potential tax relief of 60%.
The new pension freedoms launched by George Osborne mean there is no limit to the amount of income you can take from your pension. Once you are ten years away from the state pension age you can withdraw as much or as little as you like, when you like. Traditionally you would exchange your pot for an income for life, i.e. an annuity. Studies have shown that, in retirement, income needs start to reduce in later life. It makes sense, therefore, to be able to withdraw a little more in the early years.
If you are fortunate enough to have an estate valued in excess of the nil rate band, any remaining funds in your pension will not be counted towards the combined value of your estate. This can mean that if you have other sources of income a pension can be a effective and simple inheritance tax planning tool.
The number of times we’ve heard people suggest withdrawing from the pension to invest in ISAs for the tax benefits. When actually a pension is just as tax efficient as an ISA. There is no capital gains or income tax on the funds held within the pension plan.
Even if your tax position doesn’t change in retirement, you can still benefit from 25% as a tax-free lump sum. And it doesn’t have to be taken in one go, phased drawdown means you can take the 25% gradually to supplement your income. This solution also keeps down the size of your estate if your have an inheritance tax issue.
Since the advent of pension freedoms, your dependants can now inherit your pension, rather than being paid a lump sum. This helps if your dependants are young and a lump sum may not be in their best interests. Or if your spouse survives and a lump sum would cause an inheritance tax liability on their death. If you die before 75 years it will be tax-free, or taxable in the hands of the recipient after aged 75.
There’s a lot to like about pensions right now, but note this information is based on current legislation and may be subject to change. Keep an eye our for our budget update in October for the latest information.
The rules around pensions remain complex and all our advisers at Ovation are pension transfer specialists. They follow the training and competence rules from the Financial Conduct Authority and have the appropriate qualifications and the permission to help you in this area.