A comfortable retirement

In this section we consider some key strategies to help with your retirement planning, but please contact RNS for advice tailored to your circumstances.

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:

• Do you have an employer pension scheme?
• Are you self-employed?
• How much can you invest for your retirement?
• How much State Pension will you receive?

Individuals who reached State Pension age after 5 April 2016 receive a flat-rate pension, worth £203.85 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 is £156.20 a week.

To receive a State Pension forecast you can request via your Government Gateway account or 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 introduced compulsory workplace pensions for eligible workers. Under auto-enrolment, all employers must automatically enrol all eligible workers into a qualifying pension scheme. 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 £60,000, 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 £260,000. For every £2 of adjusted income over £260,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.

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 2023/24.

Kevin has unused annual allowances of £30,000 from 2020/21, £5,000 from 2021/22 and £20,000 from 2022/23 (total £55,000). Kevin’s income is less than £200,000.

Kevin’s maximum pension investment is therefore set at £115,000 (£60,000 plus £55,000) for his 2023/24 PIP. He needs to make a pension contribution of £90,000 (current year allowance £60,000 and £30,000 unused relief from 2020/21) in order to avoid the loss of the relief brought forward from 2020/21.

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.

Case Study

Linda will earn £60,000 in 2023/24. She will invest £12,500 into her personal pension policy. She is entitled to the basic personal allowance and has no other income.

Linda will pay her pension provider a premium, net of basic rate tax relief of £10,000. She is also entitled to higher rate tax relief on the gross premium, amounting to £2,500.

As Linda is an employee, we can ask HMRC to give the relief through her PAYE code. Otherwise, we would claim in Linda’s 2023/24 Tax Return. Thus the net cost to Linda of a £12,500 contribution to her pension policy is just £7,500.

Scotland has income tax rates which are different from those that apply in the rest of the UK. Pension payments by Scottish taxpayers paying at the starter rate of 19% will be treated in the same way as 20% taxpayers in the rest of the UK. Scottish taxpayers who pay tax at 21%, 42% or 47% claim the difference between these rates and the basic rate of 20%. Contact us for specific advice.

Accessing your personal pension fund

Taxpayers have total freedom to access a pension fund from the age of 55. Broadly, this will increase to 57 from April 2028. Access to the fund may be achieved in several ways.

Buy an annuity

Up to 25% of the fund value may be taken as a tax-free lump sum with the remainder converted into an annuity which provides guaranteed income for life.

An annuity is taxable income in the year of receipt.

Invest in a 'flexi-access drawdown account'

When an allocation of funds into a flexi-access account is made the member typically will have the opportunity of taking a tax-free lump sum of up to 25% of the fund value from the fund. The remainder is then invested by the pension provider.

The taxpayer will then decide how much or how little to take from the flexi-access account. Any amounts that are taken will count as taxable income in the year of receipt.

Take ad-hoc cash sums

Access to some or all of a pension fund without first allocating to a flexi-access account can be achieved by taking small cash sums periodically from the fund (known as an uncrystallised funds pension lump sum). The tax effect for each payment withdrawn will be:

• 25% is tax-free
• the remainder is taxable as income.

Limit on tax-free amount

The maximum amount which can be withdrawn tax-free is limited to £268,275. This amount could be higher in certain circumstances where the lump sum has been previously protected.

Money Purchase Annual Allowance

The government is alive to the possibility of people taking advantage of the flexibilities by 'recycling' their earned income into pensions and then immediately taking out amounts from their pension funds. The Money Purchase Annual Allowance (MPAA) sets the maximum amount of tax-efficient contributions an individual can make in certain scenarios. The allowance is set at £10,000 per annum, with no carry forward of the allowance to a later year if not used in the year.

The main scenarios in which the reduced annual allowance is triggered are if:

• any income is taken from a flexi-access drawdown account; or
• an uncrystallised funds pension lump sum is received.                                          

However, just taking a tax-free lump sum when funds are transferred into a flexi-access account will not trigger the MPAA rule.

Your next steps: contact us to discuss…

• Calculating how much you need to save to ensure you enjoy a comfortable retirement
• Tax-advantaged saving for your pension
• Saving in parallel to provide more readily accessible funds
• Saving in employer and personal pension schemes
• Using your business to help fund your retirement

If you would like advice on personal tax planning strategies, please contact RNS.