Pension planning is a complex area – Sherborne’s AFWM Ltd’s independent financial adviser, Dan Driscoll highlights some key considerations.
Nearly seven years on from the introduction of pension freedoms, the demand for pensions advice continues to be strong. With the events of the pandemic still creating uncertainty, could you benefit from a review into your own pension planning approach?
What if I have unused pension allowances from previous years?
This can be particularly important if you’ve had a large redundancy payment, are a business owner/ Director or if you’re a high earner. The carry-forward rule lets you take advantage of any unused allowance from the previous three tax years.
If you’ve used all this year’s allowance (£40k), but you hadn’t used any allowance from the previous three tax years, you could invest up to an extra £120,000 in your pension in the current tax year.
Effectively, you’d pay in up to £96,000, with the government’s contribution adding up to £24,000 in basic-rate tax relief to the pension.
If you were a UK additional-rate taxpayer, you’d also be able to claim up to a further £30,000 in tax relief via your tax return. There are two requirements to be able to carry forward pension allowances:
• You’ve had a pension in each year you wish to carry forward from, whether you made a contribution or not. The State Pension doesn’t count.
• You have earnings of at least the total amount you’re contributing this tax year. Or if not, your employer could contribute to your pension – this is likely to be most relevant for those with their own limited companies.
Effective use of your savings in retirement
Having the right investment strategy combined with ensuring that the level of withdrawals remain sustainable are critical elements of your retirement plans. But it is also vitally important that those withdrawals are as tax efficient as possible.
Retirement with pension savings only
If you are solely reliant on pension savings in retirement, using your personal allowance is key
to ensuring funds last as long as possible.
A personal pension becomes a ‘crystallised pension’ as soon as you cash it in and start taking your retirement benefits.
You can currently crystallise your pension from the age of 55, and can access your crystallised pension via drawdown or an annuity.
The personal allowance currently sits at £12,570 – this allows you to crystallise £16,760 each year without paying any tax. Alternatively, where a higher income is needed and to spread the tax free cash over more years, the full crystallised amount could be taken each year.
Factor in the State Pension to your plans, as this may mean altering the amounts drawn from other pension savings.
Semi-Retirement
You may not want to fully retire, but instead reduce the hours you work, or take up something that has been a long-held ambition. This becomes more of a possibility from age 55 (57 from 2028) if you can support your part-time earnings by accessing your pension.
The choice is then whether to take tax free cash only, or a mix of tax free cash and income. Taking tax free cash only could mean more tax on the income element in future years.
However, there is an argument for taking tax free cash only: when you draw taxable income from your pension drawdown pot for the first time, the ‘money purchase annual allowance’ is imposed.
This means that the total of future contributions to money purchase pension schemes is limited to £4,000 a year. Anything over this will be subject to the annual allowance tax charge.
This could restrict future planning opportunities via pension savings. You could even lose out on employer contributions.
At AFWM we offer independent and impartial advice to help you plan around these key considerations. We offer a free, no obligation consultation meeting to any prospective clients and don’t have any minimum investment requirements. If you would like to book an appointment, please contact AFWM Ltd on 01935 317 707 or dan.driscoll@afwm.co.uk.
