We’re the first to admit that pensions aren’t the most thrilling of topics, but we wouldn’t be doing our jobs properly if we didn’t work to educate our clients on the importance of saving for their future retirement. A survey published by the personal finance comparison website Finder in October 2018 found that 35% of Brits claimed they did not have a pension, while 36% did not know how much was in their pot. Data held by Equiniti, the UK’s largest pension scheme administrator, found that you are likely to live 1.5 years longer with an annual pension income of £25,000 – £30,000 compared with someone who receives £10,000 – £15,000 per annum. We, therefore, thought it might be helpful to come up with some tips to get the most out of your pension.
1.) START SAVING EARLY
It’s unlikely that saving for retirement is at the forefront of many millennials’ minds, what with endless travel opportunities, saving for a house deposit or regular avocado on toast brunch dates (although speaking as a millennial, I resent that last one!) often proving to be more appealing ways to spend money. But by starting to save into a pension early, the benefits of compound interest can take the pressure off the investment returns required to provide a sufficient income in retirement. Shannon wrote a blog post which explains the importance of saving early, which you can read here. Having said this, the upper age limit to receive tax relief on pension contributions is 75, so even if you’re not fortunate or unfortunate enough (depending on your point of view) to be tarnished with the millennial paintbrush, it’s not too late to start saving!
2.) ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVCs)
If you have been unable to start saving early, it is possible to make up for lost time by contributing via Additional Voluntary Contributions. If you come into some extra money, paying a lump sum into your pension is a quick and easy way to give it a boost. As with other payments into your plan, the government will top it up with tax relief (up to certain limits). You can pay as much or as little as you like into an AVC pension as long as you don’t exceed the pension contribution limit, which applies to all of your pensions. For 2019/20 this limit is set at 100% of your income, with a cap of £40,000. It is also possible to benefit from Carry Forward Relief which lets you take advantage of any unused allowance from the previous three tax years. That’s up to £40,000 from each year. Please note: for individuals with an adjusted income over £150,000 and a threshold income over £110,000, this annual allowance will be tapered. This means that for every £2 of income they have over £150,000, their annual allowance is reduced by £1. For further information on how this is calculated, please get in touch.
3.) CHECK YOUR STATE PENSION ONLINE
Most individuals will be eligible to receive a state pension. Under the new state pension rules, entitlement is calculated based on number of years of National Insurance contributions, with 35 years creating entitlement to the full amount. With the maximum new state pension of £168.60 per week from 6th April 2019, or £8,767.20 a year, it should not be underestimated how valuable this additional income could be. You can find out how much state pension you are eligible for here: https://www.gov.uk/check-state-pension
4.) DO THE MATHS
How much income will you need in retirement? This may be difficult to answer accurately for many people, but here are some questions to ask yourself: What will your living expenses be? Will you have paid off your mortgage? Will you be responsible for any education fees for your children or grandchildren? What are your plans for retirement? Do you expect to receive any other income (for example, investment or rental)? There are many aspects to consider, but we regularly work with clients to help them determine how much they are likely to require, so that a suitable strategy can be put in place to help them achieve their goals in retirement. Most people go through three phases of retirement. The timing of each phase will be different for everyone, but the sequence is the same.
• The active years. In the early years of retirement, many finally have the flexibility to travel, spend time with grandchildren and pursue other interests. Expenditure is likely to be high, especially if overseas travel is high on the bucket list.
• Slowing down. At some point niggling health problems may emerge. As mobility and activity declines, so does spending.
• The frail years. Most of us hope to remain in our own homes, but many will spend time in residential care. Spending is likely to increase significantly during this phase. While government support may provide assistance for those who have limited finances, having savings will increase options and access to high quality care at home or in residential care.
5.) FINAL SALARY SCHEMES
If you are fortunate to be a member of a final salary scheme, sometimes called a defined benefit pension, you will be offered a guaranteed income for life based on the number of years of service in employment. Most final salary schemes offer a Cash Equivalent Transfer Value (CETV) which will very often look like an attractive sum, but it must be remembered that this amount will be required to support you for the rest of your life; and in fact a guaranteed income for life (with potential increases in line with inflation) may prove to be more valuable – especially if you live a long retirement.
6.) BE AWARE OF MPAA
Currently you can pay up to £40,000 a year (or 100% of your salary) into a pension scheme and get tax relief on your contributions. This is known as your Annual Allowance. However, if you start to take money from a defined contribution pension, the amount you can pay into a pension and still get tax relief reduces. This is known as the Money Purchase Annual Allowance or MPAA. The MPAA for 2019/20 is set at £4,000, meaning that if you trigger this allowance, any contributions in excess of this amount will not receive tax relief and could be subject to a tax charge.
Of course, as with most things, it is important to strike an appropriate balance between saving for the future and having sufficient funds to maintain an acceptable standard of living in the present. If you would like to discuss how FPWM might be able to help you with retirement planning, please get in touch.