Finance on Friday

Finance on Friday: The recent pension changes, and why there’s never been a better time to save for your retirement

By Ella Davies

In a new series of Finance on Friday columns for Altrincham Today, Ella Davies from local business LIFT-Financial takes at look at the recent significant changes to the world of pensions.

There has been much press coverage lately regarding the new ‘Pension Freedoms’ and the fact that you can now effectively treat your pension like a bank account, making unlimited withdrawals as soon as you are aged 55. The changes are quite exciting for pension techies such as myself, but they also mean that for most people, saving for retirement has never been more advantageous.

It is firstly important to note that the changes only relate to money purchase pensions (also known as Defined Contribution) whereby your contributions are invested, building a pension pot which will then be used to provide an income in your retirement*.

The changes do not relate to final salary pension schemes (also known as Defined Benefit) as the legislation in this area remains unchanged.

In a nutshell, pensions now provide the following benefits:

  • Tax relief on personal pension contributions
  • Tax-free growth on the underlying fund value
  • A tax-free lump sum of up to 25% of the total value of your pension pot
  • Unlimited withdrawals after the age of 55
  • Tax-free death benefits should you pass away before the age of 75

The last point means that pensions are not only a great way of saving for your retirement but they are also an excellent tool for Inheritance Tax planning as well.

Pensions are now at their most flexible, but it is very important that any withdrawals are carefully managed to ensure the level of tax you pay on your retirement income is not too high and that your pension pot doesn’t run out too soon.

After all, as a nation we are living longer and should you withdraw your pension to buy a Ferrari, this will then leave you to rely on the state pension which as we know is minimal and probably wouldn’t be enough to pay for the Ferrari’s fuel!

[blockquote]One final warning… do not accept any advice from cold callers.[/blockquote]

It is also very important to understand the taxation of your pension income, as any large withdrawals could push your earnings into the next income tax bracket, meaning you could be paying 40% or 45% income tax on your pension income.

One final warning… please do not accept any advice from cold callers. Unfortunately the recent changes have meant there has been an influx in these types of calls from people offering to help you withdraw your pension fund.

I have personally received a number of these calls of late (I don’t think they knew their audience!) and the level of professionalism was next to nothing. It is therefore always extremely important you seek quality independent advice in this area.

* The ultimate returns depend on the amount invested, the charges levied and the performance of the underlying funds.