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Retirement planning strategies
It is essential to ensure that you put aside sufficient funds during your working life to allow for a comfortable retirement in the future. You could spend a third of your life as a retired person, so by taking action now, you can help to make this period as financially secure as possible.
Many options are open to retirees in regard to how they use their savings. It is important to seek appropriate advice on
the options available to you. Here we outline some of the key areas to take into consideration when planning for your ‘golden years’.
Initial considerations
Your retirement planning strategy will be determined by a number of factors, including your age and the number of years before retirement. However, there are some other key issues
to consider:
y Do you have an employer pension scheme?
y Are you self-employed?
y How much can you invest for your retirement? y How much State Pension will you receive?
Individuals who reached State Pension age after 5 April 2016 receive a flat-rate pension, worth £179.60 per week where they have at least 35 years of national insurance contributions (NICs) or credits.
Those who reached State Pension age before 6 April 2016 will continue to claim their basic State Pension (plus any additional state pension that they may be entitled to). The basic State Pension in 2021/22 is £137.60 a week.
To receive a State Pension forecast you can phone the Future Pension Centre on 0800 731 0175.
Employer pension schemes
There are two kinds of employer pension scheme into which you and your employer may make contributions. A defined contribution scheme pays a retirement income reflecting
the amount invested and the underlying investment fund performance. A defined benefit scheme pays a retirement income related to your earnings: such schemes are very rare. However, in both cases, you will have access to tax-free cash as well as to the actual pension.
Pensions auto-enrolment
In order to encourage more people to save for their retirement, the government has introduced compulsory workplace pensions for eligible workers. Under auto-enrolment, all employers must automatically enrol all eligible workers into a qualifying pension scheme. From April 2019 there is generally a minimum overall contribution rate of 8% of each employee’s qualifying earnings, of which at least 3% must come from the employer. The balance is made up of employees’ contributions and associated tax relief.
Personal pension schemes
Relying on the State Pension will not be adequate for a comfortable retirement, so if you are not in a good employer scheme, you are advised to make your own arrangements.
To qualify for income tax relief, investments in personal pensions are limited to the greater of £3,600 and the amount of your UK relevant earnings, but subject also to the annual allowance. The annual allowance is £40,000, but this is tapered for individuals who have both threshold income (broadly net income plus any reductions in salary for salary sacrifice or flexible remuneration schemes less gross personal pension contributions) over £200,000 and adjusted income (broadly their income and employer’s pension contributions plus employee contributions via a net pay arrangement) over £240,000. For every £2
of adjusted income over £240,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £4,000.
Where pension savings in any of the last three years’ pension input periods (PIPs) were less than the annual allowance, the ‘unused relief’ is brought forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year. The unused relief for any particular year must be used within three years.
Case Study
Kevin has not made any contribution into his pension policy so far in 2021/22.
Kevin has unused annual allowances of £30,000 from 2018/19, £5,000 from 2019/20 and £20,000 from 2020/21 (total £55,000). Kevin’s income is less than £200,000.
Kevin’s maximum pension investment is therefore set at £95,000 (£40,000 plus £55,000) for his 2021/22 PIP. He needs to make a pension contribution of £70,000 (current year allowance £40,000 and £30,000 unused relief from 2018/19) in order to avoid the loss of the relief brought forward from 2018/19.
If contributions are paid in excess of the annual allowance, a charge – the annual allowance charge – is payable. The effect of the annual allowance charge is to claw back all tax relief
on premiums in excess of the maximum. Where the charge exceeds £2,000, arrangements can be made for the charge to be paid by the pension trustees and recovered by adjustment to policy benefits.
Tax relief on personal pensions
Premiums on personal pension policies are payable net of
basic rate tax relief at source, with any appropriate higher or additional rate relief usually being claimed via the PAYE code or self assessment tax return.
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