Retirement Planning
Planning for retirement is probably one of the most important
things that we do, because upon decisions made while working
will depend the standard of living enjoyed (or not) later
in life.
 The
government recognises that it simply cannot provide a decent
pension and despite it having announced that the link between
average earnings and pensions will (probably) be restored
in 2012, this will be starting from a base that has eroded
for almost 20 years, through being linked to inflation during
that time.
In simple terms, pensioners have been getting progressively
worse-off, compared with those in work, for more than a decade
because wages usually rise faster than inflation.
Because of this, personal provision is essential and the
government wishes to encourage more of us to save for our
own retirement and changed the rules in April 2006 so that
everyone can now potentially invest a substantial amount of
money towards their retirement.
Anyone (together with their employer, if they have one) can invest as much as they wish into any number of pension schemes. However there is an annual allowance beyond which no tax relief is available, set at £245,000 for 2009/10, rising to £255,000 for each of the tax years 2010/11 to 2014/15.
- For personal contributions tax relief is limited to earnings from trade profession or employment, where this is less than the annual allowance.
- If employer contributions are made in excess of the annual allowance a substantial tax penalty applies.
Tax relief on contributions is allowable for everyone. For people with little or no earnings, tax relief is available until total contributions for the year reach £3,600. For all others, tax relief is available up to 100% of earnings (subject to the annual allowance) at the highest marginal rate of tax they pay. Personal contributions above this level do not attract tax relief and employer contributions above the annual allowance involve a hefty tax penalty.
Tax relief will effectively be limited to the basic rate for very high earners, from April 2010. (These are defined as individuals with a total income [including investment income and interest] of £150,000 a year or more.) Anti-avoidance rules limit increases in contributions for the tax year to April 2009.
The total fund must not rise above a “lifetime allowance” set at £1.75 million for 2009/10 and then £1.8 million for each of the tax years 2010/11 to 2014/15. If the fund does rise above the lifetime allowance, a substantial tax charge will apply.
At retirement
Under the new rules everyone is entitled to a lump sum (currently
free of tax) of up to 25% of their pension fund (subject to
a maximum of 25% of the lifetime allowance). This can be taken
at any time from age 50 (rising to age 55 in April 2010) even
if they continue working and do not draw an income from their
pension.
It is not necessary to purchase an annuity, but an income
can instead be drawn from the fund from zero up to 120% of
the amount you would get from a level single-life lifetime
annuity that could be purchased by a person of the same sex
and age. This option extends beyond age 75, subject to different
limits, but new rules make this less attractive, so that annuity
purchase by age 75 maybe more practical. Any “tax free”
cash lump sum required must be taken by age 75.
THE VALUE OF YOUR INVESTMENT CAN GO DOWN AS WELL AS UP AND YOU MAY NOT GET BACK THE FULL AMOUNT INVESTED. LEVELS AND BASES OF AND RELIEFS FROM TAXATION ARE SUBJECT TO CHANGE AND THEIR VALUE DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF THE INVESTOR. THE FINANCIAL SERVICES AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING.
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