Chris Bourne is a Senior Consultant at leading Midlands based Independent Financial Advisers, PIA Wealth Management. He specialises in all aspects of wealth and retirement planning, with specific expertise in investments, pensions and taxation.
The 6th April 2015 was a momentous day in financial services, as it marked the beginning of a new pension regime and some of the most significant changes we have ever seen. Much has already been written on the subject, but what difference will these changes make to you?
Fundamentally, the whole game has changed. Previously, if you hadn’t started making private pension contributions by a certain age, it was almost pointless doing so, because the pot wouldn’t have time to grow enough to produce a reasonable income at retirement. This is no longer a problem, because you are not restricted on how you withdraw from your pension when you retire; you can take as much or as little as you like.
Let’s make no bones about it; some people just don’t like pensions, and this is usually because they, or somebody close to them have lost money in a pension in the past or have received poor value from an annuity. This now needs to be put to one side and pensions looked at for what they are – fantastically tax efficient investment vehicles.
It must be remembered that when a pension falls in value, it is the underlying investments that have fallen, which is not the fault of the pension itself. A pension is simply a wrapper, like an ISA or an investment bond, with its own special tax treatment.
Consider the situation of Mr and Mrs Jones now in their 50’s, where Mr is the sole income earner and is in a good company pension scheme, and Mrs does not work and has no pension provision of her own. Their situation is comfortable and they have some spare money to save or invest… As anybody can pay up to £3,600 per year into a pension, regardless of their earnings, it would now seem sensible for Mrs Jones to make some pension contributions.
Every pension contribution made has 20% added to it by the government – this is called tax relief. As soon as you make a payment into a pension, you have made 20% growth on it. In Mrs Jones’ case, she can pay in £2,880 every year between now and when she retires, which will be made up to £3,600 with tax relief (£720 added on top for free!).
When the Jones’s retire, Mrs Jones can take whatever she wants out of her pension, but it would make sense to withdraw an amount within her personal allowance (£10,600 in 2015/16) to enhance the household income, which is largely derived from Mr Jones’s own arrangements. This way, not only would she have benefited from the tax advantaged growth of the pension, but she can take the money out tax free too. You are of course allowed to take 25% of any lump sum withdrawal tax free, regardless of your income situation.
If Mrs Jones was working and received an income greater than £3,600, she could pay even more into her pension every year – any amount up to her annual earnings (subject to a yearly maximum of £40,000) could be paid in.
The above is just one of a multitude of opportunities presented by the new Pension Freedoms and it is important to seek qualified, independent financial advice to see how you can benefit.
Chris Bourne
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