The rules around pensions can seem complex and confusing. From the lifetime allowance to pension tax relief, the details are often changing, and this can leave savers feeling bewildered when it comes to their long-term retirement plans.
Pension schemes are often an attractive company benefit too, especially in an increasingly competitive legal job market. Here, Brewin Dolphin considers some of the myths for Legal News readers – and what you need to know.
Myth 1: The state will provide for me
The new state pension pays £175.20 per week, or £9,110.40 per annum. This is unlikely to provide for even a very modest standard of living for a single person. Depending on your working history, you may find you do not fully qualify for the full amount. You can check your state pension entitlement at gov.uk/check-state-pension.
Myth 2: Annuities are dead
Since the introduction of Pension Freedoms in 2015, income drawdown has offered pension savers a more flexible approach to producing a retirement income. Meanwhile, annuities have become increasingly unpopular, being plagued by limited flexibility and poor rates. But annuities can be a useful part of retirement planning, by providing a secure income to cover everyday bills, for example. Purchasing a guaranteed income for life in the form of an annuity could be invaluable for many people.
Myth 3: Tax-free cash is always 25% of your pension pot
The headline rate of pension tax-free cash is 25%, but some pension savers with older style company pension schemes may find that they have a greater amount of protected cash available. Yet many people in these occupational schemes often forget that they are eligible for this. It is always worth enquiring about your pension’s benefits, rather than assuming they are the same as other schemes. An adviser can help clarify your situation and ensure you don’t lose valuable benefits.
“For most people, simply enrolling in your company pension scheme will not be enough to create a comfortable nest egg.”
Myth 4: I can’t exceed the lifetime allowance
The lifetime allowance, which currently amounts to £1,073,100 for 2020/21, is not a maximum limit. You can save more than this into a pension, but you may face a tax charge. The amount of tax you pay depends on how you draw the money and can amount to 55% on the excess if you take it as a lump sum. If this money is held to age 75, or drawn as an income, the surcharge is only 25%. A good adviser will be able to work out a plan to create a tax-efficient drawdown strategy.
Myth 5: I can’t take my company pension before 65 because I will pay a penalty
Benefits taken before age 65 may be subject to a penalty, but it might be worth it. If you take benefits early from a defined benefit, or final salary scheme, there may be a reduction in available income. You would be getting a lower pension, but for a longer period. This could, for example, potentially put you in a lower rate tax bracket, or bring benefits below the lifetime allowance. However, you might want to consider what other savings you could access first, such as ISAs or other investments.
Myth 6: I am OK because my retirement savings are in a default lifestyle fund
This may be the case if you are planning to retire at your normal retirement age and looking to purchase an annuity.
“But, if you are planning to retire in a more flexible way, by taking semiretirement, say, or working longer, then looking at what your default pension is invested in is particularly important.”
Most default funds shift your money into cash and bonds the closer you get to retirement to avoid any sudden losses. However, if you are planning to use income drawdown, then staying invested is likely to be more appropriate.
Myth 7: My pension dies with me
A defined benefit, or final salary, pension scheme may be limited to paying an income to your dependent. However, most other pensions enable you to leave your pot to a beneficiary, and they don’t have to be your partner. Make sure that your provider knows who you would like to leave your pension by completing a so-called expression of wishes form. If you die before age 75, pension benefits can usually be passed on tax-free. Bear in mind that if you take your tax-free lump sum but do not use it before you die, it becomes part of your estate and your beneficiaries will pay IHT on it.
Myth 8: I am in a workplace pension and so don’t need to worry
For most people, simply enrolling in your company pension scheme will not be enough to create a comfortable nest egg. It is quite possible that someone could save for 40 years in work to fund 30 years in retirement. So, the amount required by a basic workplace pensions may well not be enough.
Seeking financial advice can clarify your retirement strategy, reduce tax liabilities, and ensure your plan is specifically tailored to your individual needs.
For more information and support for you and your clients, please contact Brewin Dolphin’s Cardiff office, here.
The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance. Opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
This information is for illustrative purposes only and is not intended as investment advice. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us. Please note that the information in this article is for information purposes only and does not constitute advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.