A year of pension change – and more to follow
How you save for retirement and what you do with the money once you stop working are some of the biggest and complicated decisions you will ever make, so it is important to understand what the reforms mean, and how they will impact on you in the years ahead.
There have been a lot of big upheavals with pensions and retirement planning over the past 12 months. Here we look at some of the changes to pensions and the concerns individuals need to think about as they approach retirement and once they finish work.
A major development in 2015 was the changes to the way people can access their pension savings from the age of 55.
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It now means over 55s may be able to take any amount from their personal, stakeholder and some workplace pensions – all of it in one go, if they wish – without the need to buy an annuity or moving their pension fund into a drawdown pension policy. They will be able to take up to 25 per cent of their pension savings as a tax free lump sum. Any amount above this will be subject to income tax at their highest marginal rate.
While new rules have provided more flexibility and allowed people greater access to their pension savings, it is still important to carefully consider your options.
Withdrawing all the funds from a pension, either in one go or in regular withdrawals, may sound remarkably simple and tempting. However, that money you have been saving up for decades will need to last you for the rest of your life, and could be quickly depleted if you make regular sizeable withdrawals.
What to do with the lump sum
If you do decide to take lump sums from your pension pot, your next decision will be what to do with the money. For example, you may choose to use the lump sum to pay off your mortgage or any other loans, enabling you to enter your retirement debt free. It is recommended to talk to a qualified adviser before making a decision.
Annuity could still be best
While annuities have received some criticism in the past around their value, they still provide the security of a regular income over a lifetime that cannot be guaranteed by taking a cash lump sum or investing the money yourself, so in many cases could remain the best option for providing a retirement income.
Changes for 2016
Further changes to pensions are being introduced from April 2016. These include the reduction in the Lifetime Allowance, the amount someone can build up in all of their pension plans throughout their lifetime without incurring a tax charge, to £1 million from 6 April 2016.
The Annual Allowance, the amount that can be saved into a pension in each tax year without incurring a tax charge, will remain at £40,000 for the 2016/17 tax year, but it will be tapered from 6 April 2016 for those with incomes (including the value of any pension contributions) of more than £150,000.
People caught by this rule will have their Annual Allowance reduced by £1 for every £2 income over £150,000, down to a minimum of £10,000.
To prevent retrospective taxation individuals will have an annual allowance of £80,000 for 2015/16, with £40,000 available for savings between 9 July 2015 and 5 April 2016.
The pension changes that took place in 2015 are being modified again in 2016 showing how complex planning for retirement is. Talk to a qualified financial adviser who will be able to help you ensure your pension finances will be able to fund your plans for retirement.
For more information about how Wesleyan can help your business, visit the website at www.wesleyan.co.uk or call 0800 980 9351.
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