Pensions & Retirement Planning
When it comes to providing for our retirement, too many people are doing too little too late. Putting away even a small sum early on can make a big difference to the lifestyle you will enjoy when you retire. The golden rule for most people, is to not rely on the State alone. Modern pensions benefit from some very exceptional tax breaks, and nowadays, you can even contribute to your pension when you don't work!
A Day: Everything's changed!
In April 2006, the government simplified the pension contribution process, Industry insiders dubbed these sweeping changes as A-Day. So what does it actually mean?
Previously, your contributions would have been limited to a percentage of your earnings, now there’s one rule for all, which is of particular assistance to people in the 20 to 40 age bracket that may have put off investing in a pension. These groups can now put in larger sums later, instead of saving modestly, without being penalised for doing so. Remember, however, that the benefits of saving early can be substantial.
You can now invest up to 100% of your earnings, or £3,600 whichever is higher.
However, two main limits apply:
· Annual Limit
If you pay in more than £245,000 (2009 / 2010 tax year) then you will have to pay tax on any payments over that amount.
· Lifetime Limit
If your total fund value, including every pension you hold, is worth more than £1.75 Million (2009 / 2010 tax year) when you retire, then you will have to pay tax at a punishing 55% on any value above this lifetime limit.
Any money your employer pays into your pension will count toward these limits.
Pension Simplification
From 6 April 2006 A-DAY there is one set of rules for all types of registered pensions, the difference in contributions rates and the maximum benefits payable between personal pensions (PPS), retirement annuities (RA) and occupational (OPS) will disappear.
Instead Individual pensions will have a:
Lifetime Allowance, is the total capital value of all your pension arrangements, but not your State Pension, which you can build up without paying extra tax.
The lifetime allowance for 2009/2010 is £1.75 million
Annual Allowance, An individual can contribute 100% of earned income to a registered pension scheme and get tax relief on contributions at this level but there is a limit.
The annual allowance for the tax year 2009/2010 is £245,000.
More individuals will have greater flexibility in the size and timing of their contributions.
In many cases there will be no need to make contributions checks.
Forms of retirement benefits
Schemes will be able to pay out a commencement lump sum up to 25% of the fund value. The remainder must be used to provide an income in the following ways.
Secured -a guaranteed income ( a lifetime annuity or scheme pension)
or
Unsecured Pension-is a an alternative to buying an annuity, it allowes you to draw an income from your pension funds while leaving your funds invested up to age 75. The maximum income will be 120% of the annnual income available from a single life non-guaranteed annuity based on the individuals age and using Government Actuarie's Department figures (GAD)
After age 75 you have the choice to take an Alternative Secured Pension (ASP) this allowes you to draw an income from your pension without buying a Lifetime annuity. The maximum you will be able to draw will be 70% of a level single life annuity. You can convert this ASP into a Lifetime Annuity at any time.