From age 55 you can start drawing from your pension fund with the first 25% being tax free, however care needs to be taken if drawing more than this as your future pension contribution level will be reduced.
Before April 2015, most people bought an annuity, however that has all changed since due to the pension freedom legislation that came into effect at that time which allows much more financial flexibility meaning that income drawdown is now proving to be the more popular choice.
Pension plans or schemes are savings products specifically designed to provide an income for when you stop working and retire. The government provides generous tax benefits on your contributions and the profit made for pension funds.
Pension Plans are usually individual funds in your name whereas pension schemes are employer provided and based on your years of service and final salary. For full details please refer to our Retirement Options Guide
When it comes to pensions there are two main phases – Before Retirement and After Retirement.
Before Retirement – the accumulation phase
In the accumulation phase you are just aiming to build up as big a fund as you can, subject to a maximum permissible amount, and this can be done via a personal pension plan or an employer provided pension plan/scheme, here we focus on personal pension plans including employer arranged auto enrolment pension arrangements and Group Pension Plans. Please get in touch if advice is required on Company Pension Schemes.
The tax relief on contributions is currently based on your own personal tax status with a minimum of 20%, even for non-tax payers. This means that if you have a £100 per month pension plan it only actually costs you £80.00 per month with the difference claimed by the pension company on your behalf. Higher rate tax payers can claim an additional 20% relief through their tax returns. At retirement 25% of the pension fund can be taken as tax free cash lump sum.
A large proportion of people have one or more frozen/preserved pension plans which more often than not have been neglected and people don’t generally know what to do with them. At Money Matters FS Ltd we have invested in sophisticated computer software which enables us to analyse existing pension schemes and provide comprehensive reports to help give some direction and clarity to your retirement planning.
After retirement – the decumulation phase
This is where you start to take the money back out of the pension fund as income and so the more you have saved the more you will be able to take. There are various methods used for this, traditionally it was via an Annuity which is still available but in recent years Drawdown has become more popular mainly due to the poor annuity rates and the better flexibility available from drawdown.
ANNUITY – With an annuity you hand over some or all of your pension fund to an annuity provider in return for a guaranteed income for life. You can have a single life annuity or a joint life annuity, it can be the same amount each moth or have annual increases.
With annuity, the income level is chosen by the Annuity provider and is based on their annuity rates, your age & health and the pension fund.
DRAWDOWN – With drawdown your pension fund remains invested, either with your current pension fund provider or is transferred to another more suitable or preferred provider, and you choose the level of income to drawdown from the fund. It’s important to remember that investment risks will continue to apply, and you could get back less than you leave in.
Money Matters FS Ltd are experts at helping our clients decide how much income to take to suit their needs and any taxation associated with it while selecting the most suitable investment funds for drawdown so get in touch to see if we can help you.