Money invested into a pension receives tax relief. That means your pension contributions (subject to limits set by the government) are increased by the percentage amount of your income tax bracket. So, a non- or a basic-rate taxpayer only has to pay 80 pence for each \u00a31 that is invested in their pension (an uplift of 20 per cent). Higher-rate taxpayers effectively only pay 60 pence for each \u00a31 invested (an uplift of 40 per cent) and additional-rate taxpayers (in the 50 per cent band) can benefit from 50 per cent relief.<\/p>\n
Non-working individuals can invest up to \u00a33,600 in a pension each year, but because of the\u00a0tax relief this will only cost \u00a32,880. Adults can also make such payments for children.<\/p>\n
People who have taxable income in excess of \u00a3100,000 have their personal annual tax allowance reduced at a rate of \u00a31 for every \u00a32 of income over this threshold. Currently 25 per cent of your pension fund can be taken as a lump sum.<\/p>\n
Flexible drawdown<\/strong> Many of these changes were designed to limit what the government clearly sees as over-generous tax relief concessions. But other changes have created the very appealing prospect, for people aged 55 or more, of gaining more control over when and how they can use their retirement savings.<\/p>\n Under the current rules, if you meet certain eligibility criteria, you can now take as much as you want from your pension, without the maximum income restrictions that apply to conventional drawdown arrangements. To be eligible for this facility\u00a0\u2013 known as ‘flexible drawdown’\u00a0\u2013 you have to show that you already have a ‘secure pension income’ of \u00a320,000 per year, in additional to your drawdown plan. This Minimum Income Requirement (MIR) is considered a safety net to prevent retirees draining their funds.<\/p>\n Income from registered pension schemes count towards the MIR \u2013 such as lifetime annuities, occupational pensions, or the state pension. But income from pension schemes with fewer than 20 members, typically Small Self-Administered Schemes, will not count. You must also be already receiving the income for it to be counted \u2013 it cannot be based on future income.<\/p>\n As the name suggests this option is more flexible than income drawdown. Qualifying for this option removes the cap on the income you can take. There are no income limits at all and you can draw as much income as you like when you like. However flexible drawdown will not be available to everyone and there are certain criteria that must be met before you can choose it. It is also worth remembering any income is subject to tax at your highest rate.<\/p>\n While, for many people, buying an annuity is likely to remain the most appropriate method of accessing their pension income, some will want to take advantage of these enhanced drawdown facilities.<\/p>\n Flexible drawdown could, for example, be used to meet one-off large expenditure items as they arise or to optimise your tax liabilities. It could also be a way to pass money through the generations, either by ‘gifting’ regular payments, for example into trusts, or as pension contributions to children using ‘normal expenditure’ rules so as to help avoid inheritance tax.<\/p>\n In moving money out of your pension fund before you die, you will be paying income tax on such payments but at a rate that is lower than the 55 per cent tax charge payable on a lump-sum payment from your pension fund when you die.<\/p>\n Another age-restricted benefit where the rules have been eased is the opportunity to take tax-free cash\u00a0\u2013 typically a quarter of your pension pot\u00a0\u2013 when you first start to take your pension benefits. Until April 2011, if you hadn’t taken your tax-free cash by age 75, you lost the chance to do so. Now that restriction is removed too.<\/p>\n Depending on your circumstances, all these changes may well sound like good news, but there’s one important thing to be aware of. Just because the rules about when and how you take pension benefits have changed, it doesn’t mean your pension contract will have changed as well.<\/p>\n If the terms of your contract have not been updated to reflect the new legislation, you could find that you can’t take advantage of them. You could still find yourself obliged to buy an annuity at age 75. And if you haven’t taken your tax-free lump sum at that age, you could still lose the opportunity to do so.<\/p>\n Annuities<\/strong> Anyone who has a lump sum and wants to convert this into an income can buy an annuity, but most people come across them for the first time when they’re coming up to retirement and need to convert all or part of their pension fund into an income.<\/p>\n You’ll need to buy an annuity with funds from any personal pensions, stakeholder pensions and most money-purchase employer schemes. The type of annuity you buy with your pension fund money is called a compulsory purchase annuity or pension annuity. If you belong to an employer’s final salary scheme, your pension is usually paid directly from the scheme, so you don’t have to think about annuities.<\/p>\n Thousands of people should end up with bigger pensions as new rules will force insurers to inform customers about better annuity options. The Association of British Insurers’ (ABI) new code of conduct forces insurers to give more information about how consumers can ‘shop around’ for a better deal, while ensuring that those with health problems receive a higher income as a result.<\/p>\n Currently, according to the ABI, more than half of all investors who buy an annuity \u2013 which pays a fixed income for life \u2013 simply buy the default annuity deal from their current pension provider. As a result many end up buying the wrong type of annuity or effectively locking into an uncompetitive pension deal for the rest of their lives. Shopping around for the best annuity deal could increase the size of a pension by over a third. A recent report from the National Association of Pension Funds claimed that this was costing pensioners more than \u00a31bn in lost retirement income.<\/p>\n The new rules stop insurers from including an application form in the information pack sent to customers approaching retirement, making it less likely that people will simply buy the first annuity they see. These ‘retirement packs’ have been redesigned to place greater emphasis on the benefits of shopping around. Crucially, where insurers are selling an annuity to one of their existing customers, they will be required to ask about their circumstances and medical conditions before providing a quote.<\/p>\n","protected":false},"excerpt":{"rendered":" Money invested into a pension receives tax relief. That means your pension contributions (subject to limits set by the government) are increased by the percentage amount of your income tax bracket. So, a non- or a basic-rate taxpayer only has to pay 80 pence for each \u00a31 that is invested in their pension (an uplift… Read more »<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts\/1654"}],"collection":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1654"}],"version-history":[{"count":0,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=\/wp\/v2\/posts\/1654\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1654"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1654"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.suretyfp.com\/wordpress\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1654"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nPension legislation is always on the move and keeping up to date with the latest changes could open up new opportunities for you in retirement. In April 2011, some of the most significant changes in pension legislation for five years were announced.<\/p>\n
\nYou’ve spent years putting money aside into a pension scheme, but what actually happens once you retire? Sadly, it’s not as simple as simply withdrawing the money. You must now convert your pension pot into an income, which is typically done by buying an annuity.
\nAn annuity is a financial product where you exchange a lump sum for income. In the case of pension schemes, you usually exchange your pension fund for an income payable for the rest of your life, often called a compulsory purchase annuity.<\/p>\n