Late June 2016 Blog from John Robson CIMA Member in Practice
7 Things you did not know about your pension.
Fact 1: You can keep paying into your pension after you retire
Just because you’ve finished work doesn’t mean you have to stop paying into your pension.
You can keep making contributions and receive up to 45% tax relief until you are 75.
If you have no earnings, you can invest up to £3,600 each year – a payment of £2,880 to which the government adds £720.
If you have earnings, for example you take on part-time or consultancy work, you can invest more if you wish.
Fact 2: You don’t lose your pension when you switch jobs
When you change jobs, you keep any pension pot you have built up. Therefore, if your employer offers a pension it often makes sense to join – they will usually top up what you pay in, so it’s effectively free money.
On average we have 11 jobs in a lifetime which is likely to mean different pensions spread across the place. Managing them can be time-consuming and the risk of losing track increases. To make it easier, you could consider consolidating them in one pot. You should first check you won’t lose valuable guarantees or benefits or incur excessive exit fees. Transfers are normally made as cash so you will be out of the market for a period.
Fact 3: Pensions are usually free from inheritance tax
When you die, your pension can be passed tax efficiently to your loved ones. It normally sits outside your estate so there is no inheritance tax to pay.
If you die under age 75, your beneficiaries can withdraw what they like from your pension and pay no tax.
If you die after turning 75, any withdrawals your beneficiaries make will usually be taxed as their income (at 0%, 20%, 40% or 45%). They have the flexibility to withdraw what they like and control the amount of tax paid. Please note tax rules can change.
One exception to these rules is if you have converted your pension pot to a secure income known as an annuity. It depends on the options chosen when you bought the annuity: one option is for some income to continue to be paid to your spouse.
Fact 4: You can start a pension for a child (or other non-earner)
It is possible to save up to £3,600 to a pension on behalf of a child each year, such as to a Junior SIPP.
Your contributions receive 20% tax relief even though the child doesn’t pay tax, so to invest the full £3,600 you pay just £2,880 and the government automatically adds £720.
What you can save now should give your child a more secure financial future. You really will be saving for their long-term future – money in a pension cannot currently be accessed until age 55 (57 from 2028, and then increasing so it remains 10 years below the State Pension age).
In fact, this is the case for all non-earners under age 75, including non-earning spouses. You can invest up to £3,600 on their behalf each tax year and receive tax relief.
Fact 5: You don’t have to make regular contributions to your pension
In the 1980s it was common to start a pension plan with an insurance company and commit to investing a monthly amount for a fixed period, which sometimes increased throughout.
Pensions are now much more flexible and you can make contributions as and when you like.
Fact 6: You don’t have to take your pension when you retire
It is a common misconception you have to take your pension on the day you retire. Whilst some people will, investors can usually take a pension anytime from their 55th birthday (57th from 2028).
Rules which took effect in 2015 mean you now have more flexibility and can withdraw what you like. All of the following are possible.
- Access the money before you retire, for example to pay off a mortgage.
- If you take early retirement, make withdrawals until you receive your work or State Pension, then stop.
- If you semi-retire and keep working part time, make withdrawals to top up your reduced earnings.
- Make no withdrawals and leave the money invested to pass on to future generations tax-efficiently (see fact 3 above).
Whatever you decide, please remember a pension may need to last throughout your retirement. 25% of withdrawals are usually tax free (this can be taken as a lump sum if you wish) and the rest taxed as income. Once you access a pension, future contributions may be capped at £10,000 a year. Tax rules can change and the exact benefits will depend on your circumstances.
What you do with your pension at retirement is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.
The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options face-to-face, online or over the phone – Find out more about Pension Wise »
Fact 7: You’ve got 5 years to claim tax relief
One of the biggest attractions of using a pension to save for retirement is the upfront tax relief.
All UK residents under 75 receive 20% when they contribute to a pension. This is claimed by your provider and automatically added to your pension. For example, if you invest £8,000 an extra £2,000 will be added to make a £10,000 total contribution.
If you pay 40% tax you can claim back up to a further 20%, usually through your tax return. This is up to a further £2,000 in the example, reducing the effective cost of the £10,000 contribution to as little as £6,000.
45% taxpayers can reclaim up to a further 25%: £2,500 in the example, reducing the effective cost of the £10,000 contribution to as little as £5,500.
Yet, it has been estimated 180,000 40% and 45% taxpayers forget to claim their extra tax relief and miss out on £229 million each year.
I strongly advise you review all your pension arrangements and if there is anything you are not sure about or require any clarification then speak to us to make sure your affairs are in order.