What is your retirement strategy and what income/cash do you want to achieve to meet your objectives on time? Are you on target? Taking retirement planning advice early (around 6-12 months before your intended retirement date) is usually worthwhile.
Financial planning is key to meeting your objectives, whether you plan to stop work entirely or reduce your workload as you ease into retirement. Having sufficient capital to provide income and cash to meet your needs, whatever they are, both expected and unexpected, is important.
We are completely un-stressed and relaxed that our financial future is with Chapters Financial.
Mr K, Godalming
There has been much recent press about changes to pensions legislation and the increased flexibility in the way that pension benefits can now be used and drawn.
These significant pension benefit changes came into force from 06 April 2015. It should be clearly noted that the principle that a pension should provide you with income for the rest of your life does not change. Therefore, although these new changes are welcomed, the financial planning approach to any new changes should be balanced to take this longevity into account.
You may have accumulated various type of pension plan and some of these are detailed below:
Since the introduction of stakeholder pensions in 2001, new pension plans have become more flexible with lower charges. Some of the older type schemes, such as Retirement Annuity Policies (RA 226) and Executive Pension Plans (EPPs), can have significant advantages such as guaranteed annuity rates and the level of tax free cash available. These need to be checked to understand the significant value that they could offer. Other alternatives may include Self Invested Personal Pension Plans (SIPPs).
These have become very topical subjects in recent times, usually for the wrong reasons. Careful advice needs to be sought to ensure that the employee gains the real benefit that was originally offered by the employer and from any Additional Voluntary Contribution (AVC) fund or Free Standing Additional Voluntary Contribution fund (FSAVC) they have accumulated, and that the employer controls their costs. We can offer you advice on these plans to meet your individual needs.
Other types of plan can include Small Self-Administered Schemes (SSAS), Executive Pension Plans (EPPs), Final Salary (Defined Benefit) and Money Purchase (Defined Contribution) arrangements.
Although Chapters Financial can continue to advise on pension opt outs and we have an in-house Pension Transfer Specialist, we no longer provide advice or implementation services on Defined Benefit Transfers.
For initial impartial guidance on occupational pension schemes, we can signpost you to the Money & Pensions Service, an arm's-length body supported by the Department for Work & Pensions (DWP) and details can be found here: https://moneyandpensionsservice.org.uk/
Charges, term, contribution level, investment choice. All these are mixed into your retirement fund and may influence its outcome.
Our objective is to recommend good quality, low cost plans that perform well.
Pension contribution limits
The annual allowance, the upper limit for pension contributions to receive tax relief, has changed over time. From the tax year 2023/2024, the annual allowance increased from £40,000 gross pa to £60,000 gross pa from all sources.
Money Purchase Annual Allowance (MPAA)
It is important to note that those who draw any income from their money purchase (defined contribution) pension arrangements find their annual allowance restricted to £10,000 gross from all sources (tax year 2024/2025).
Contribution limits for higher earners
The annual allowance is tapered for higher earners. In the tax year 2024/2025, the annual allowance begins to taper down for individuals who also had an adjusted income above £260,000 gross. The annual allowance is reduced by £1 for every £2 of adjusted income over £260,000 gross. The minimum level to which an individual's annual allowance can be tapered is £10,000 gross pa (tax year 2024/2025).
Carry forward of used annual allowance
In addition, for those that want to go further with their pension contributions, it is also possible for pension scheme members to use a three year 'HMRC Carry Forward' facility to use up pension tax allowances from previous years (where available). As an example, this might be useful for those getting close to their planned retirement time. We recommend that you seek appropriate advice with regards to this.
Investment Risk
What we will need to understand from you is the level of investment risk that you can accept to achieve growth in your plan taking into account the term that you have to retirement and the ways in which you may wish to draw income in retirement. You may want to consider this further and details of this can be found on our website here
Pension investment
We also believe that diversity of investment is important: 'all eggs in one basket' is often not the best answer. Having reviewed you circumstances and needs, recommendations can be made to optimise the accumulation in your plan. We would also be happy to liaise with your accountant to improve your overall wealth management and tax position.
As always, you need to know that the value of your investment can go down as well as up and that past performance is not a guarantee of future performance.
Our recommendation is that all clients (and those who should be funding for retirement!) should review their existing arrangements to ensure that they have made the most of the significant opportunities available to them in the current pension regime. This includes members of occupational pension schemes who really have scope to capitalise on their existing arrangements. Proactive management of your investments is key.
Before the start of the tax year 2024/2025, there was an HMRC 'Lifetime Allowance' (LTA) for the maximum amount of all your pension savings. The LTA limit was £1,073,100 in the tax year 2022/2023, although the LTA tax penalty was removed, and has been abolished from the tax year 2024/2025 and replaced with the Lump Sum Allowance (LSA) of £268,275 and Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. Those with HMRC protection may have had higher LTA limits applicable and these protections remain valid, providing they were in place prior to 15 March 2023.
Before the start of the tax year 2024/2025, testing of the LTA was carried out when benefits were drawn. How benefits were secured had an impact on how they were valued. Benefits were usually then tested again at age 75.From April 2024, only the non-taxable amounts of lump sums will be subject to a test against the LSA. Benefits above the LSA will be subject to tax at the individual's highest marginal rate.
These LTA tests should no longer be applicable under the new rules. However, one restriction that remains in place is that tax free cash cannot exceed £268,275 without suitable protection in place. Protection must have been in place prior to 15 March 2023.
For those who have drawn pension benefits prior to 06 April 2024, and therefore used part of their LTA, a standard calculation will be used to work out how much LSA remains. The LSA is reduced by 25% of the previously used LTA. This means that if 100% of the LTA was used prior to the tax year 2024/2025, the LSA is nil.
Importantly, however, where the actual amount of tax-free cash received was lower than the standard amount allowed, an individual may apply for a transitional tax-free amount certificate (TTFA). As an example, this may apply to those who have drawn benefits from a final salary/defined benefit plan that paid no, or minimal, tax-free cash. TTFA certification must be applied for and received before further pension benefits are crystallised.
If you are affected by these issues, you may want to seek individual financial advice before drawing further pension benefits.
HMRC Fixed Protection / Individual Protection 2016
If you plan to apply for Fixed Protection 2016 for your existing pension benefits, you can achieve this online via the Government Gateway: https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance . HMRC Individual Protection 2016 is also available via the same link for those with existing accrued benefits above £1.25M. The LTA fell to £1M from 06 April 2016.
To be eligible for Fixed Protection 2016,
individuals will be required to have ceased contributions or active membership of any pension before 06 April 2016.
If you have applied for Fixed Protection or Individual Protection, you will need to be careful about the effects of your employer enrolling you in any auto-enrolment / workplace pension scheme.
It should be clearly noted that the principle that a pension should provide you with income for the rest of your life does not change. We are all usually living longer, and this is illustrated by the way that the age from which you can draw your State Pension has gradually increased for those born on or after April 1960 and will reach 67 by 2028. Further increases are planned for those born on or after April 1977. Therefore, planning your pension benefits, along with other assets that you hold, for both your immediate and longer-term needs is important to take this potential longevity into account.
With this in mind, the key points that should be considered by each client before they make any important decisions are as follows:
You will be able to draw your pension and carry on working. This allows individuals to take their benefits while continuing to work, for example part time, as they move more gradually to retirement. You may want to think about any effects on your income tax if this is the case and the combination of earned income and pension income may increase your overall tax liability.
There is no limit on the pension income in retirement that can be taken. The pension benefits that you will receive from your personal pension depend on the amount of money finally available. In my view, taking financial planning advice has never been so important for retirees and potential retirees in this climate. Starting the advice process early is vital, years in advance, to ensure that retirement is as comfortable as was anticipated when the client first started saving all those years ago.
So why start planning so early? In my view, this is because of the many options that are available for retirement benefits and that fact that each client is different, with different expectations, anticipations and assets available to meet these requirements.
Taking this a stage further, we need to consider what options are available for retirement income and I have listed some examples below:
Deferring taking pension benefits is an option at this time, especially for those who may not have planned to take pension benefits now. These may include those being made redundant at a later stage in their working career. Dependent on the circumstances, using other savings (or a redundancy payment) to subsidise income in the shorter term may be a real option if the pension fund value has fallen and needs to recover. However, a cautionary note needs to be added here. The minimum retirement age has increased to 55 from 2010. To reiterate, it is the advice at this stage after careful consideration of the situation that will guide a client appropriately. If someone continues to work past their State Pension age, they can also defer their State Pension. The advantage of this is that the State Pension increases by the equivalent of 1% for every 9 weeks deferred for those who reached State Pension age after 06 April 2016. This amounts to about 5.8% for a full year. For those who reached State Pension age before 06 April 2016, the State Pension will increase in deferment by the equivalent of 1% for every 5 weeks deferred, which amounts to approximately 10.4% for every full year. These increases can be valuable in the right situation.
The change to the State Pension to a new flat rate (£221.20 per week / full rate (2024/2025)) applies for those retiring after 06 April 2016 and is called the New State Pension. Those already in receipt of the old basic State Pension will continue to receive their previous level of benefits, up to the maximum of £169.50 per week (2024/2025). This income is paid gross, but is taxable. Other state pension benefits, such as the Graduated Pension and the State Earning Related Pension (SERPS) may be paid in addition to the standard basic State Pension. You can check what you may be entitled to here:
https://www.gov.uk/state-pension-statement
As always, advice should be sought on this issue before taking pension benefits.
In an ideal world, I would like to see a client enter retirement debt free and with 3-6 months' income on easily accessible deposit in case of an emergency. This may not always be possible, but the ability to take tax free cash at the time retirement benefits are drawn may be used for this issue. Tax free cash can now also be taken from funds accumulated by Protected Rights or Safeguarded Rights, which are Protected Rights transferred under a (divorce) pension sharing order. Therefore, care needs to be taken, especially if the benefits are being drawn from a final salary scheme or policy with a guaranteed annuity rate, as the cash gained may result in the loss of an annuity rate that cannot be replicated elsewhere.
You can choose the type of income/benefit you take. This could be:
Below are more details on some of these options.
Historically, the most common way to take retirement benefits under pension plans was to take the maximum tax-free cash sum available and use the balance of your fund to buy an annuity. An annuity is a level or increasing income for the rest of your life and is taxed in the same way as salary.
An annuity gives you payments at stated intervals (monthly as an example) until your death. You give your pension fund (in whole or in part) either to the insurance company that you have built up your funds with or to another on the open market to purchase as large a taxable income as possible, either for the rest of your life (sometimes called the Open Market Option / OMO), or for an agreed fixed term (as an example 5 years). There are several types of annuities, which can include guaranteed, value-protected, smoker and impaired life annuities.
Annuity rates have been historically low primarily because we are living longer; however rates rose significantly in 2022 and through 2023, owing to economic factors. Annuity rates will continue to change over time and may fall as well as rise. Please check current terms.
Guarantees & Dependants' Pensions
The cheapest annuity you can buy, i.e., one that will give you the highest starting income in return for your pension fund, is one that pays a level income for the rest of your life, with no additional benefits.However, when you die, no further income is payable even if you die after receiving only a few income payments.
At a cost, you can add extra benefits to your annuity at the outset, and these can include a guaranteed period of, say, five years, which will ensure that income payments continue for the fixed period after you buy the annuity, even if you die before then.You are also able to purchase an escalating annuity which will mean that your income increases in payment and may help keep pace with price increases and the effects of inflation.
Where married or in a civil partnership (or with a financial dependant), you may decide to build into the annuity a spouse's pension that will continue to be paid in the event of your death.Typically, the pension will reduce by one half or one third in this event.
Guaranteed annuities simply purchase an income based on the annuitant's age, normal life expectancy and the level of Gilt yields (on which annuity rates are based). These guaranteed annuities may be improved upon for 'impaired lives', which are subject to medical evidence, because of reduced life expectancy, and this is an area where there could be an improvement in the basic annuity rate available at the time. This might be relevant for those who have past ill health situations, continuing health conditions, and/or are smokers / ex-smokers.
Advantages of an Annuity
Disadvantages of an Annuity
By using this type of facility, you can initially take the tax-free cash (again usually 25% of the fund) and the residual fund could be used to provide a taxable income if you choose.
Income drawdown is suitable for some clients who already have income or capital from other sources and do not need to maximise the income from their pension funds.
For most post-2015 plans, any annual withdrawal limit has been removed for defined contribution (money purchase) pension schemes. There is now normally no limit on the amount of income you can draw, noting that some income drawdown 'capped' plans are still in place. Usually, we would not recommend that the maximum income is taken, as one of the risks associated with income drawdown is that if the underlying fund does not perform well and the plan charges are high, the future income could be lower than if an annuity were purchased now. Indeed, the plan value could be extinguished in your lifetime.
If no income or minimum income is taken, there is a far greater opportunity for the fund to grow and, if you opt for an annuity in the future, it is likely that annuity income will be higher. However, you would have to bear in mind that you would not have enjoyed higher income in the previous years.
There are therefore risks involved in income drawdown.
Death Benefits
One of the main attractions that income drawdown may have is the superior death benefits.
If you buy an annuity, then it is simply on your life / joint lives and there would usually be no return at all to your estate on your death beyond the guaranteed period that might be written into the contract. With income drawdown, the residual fund is available.
If you die before the age of 75 whilst taking income drawdown, or if the fund is uncrystallised (all still invested), your dependants will be able to receive the value of the remaining fund tax free. The person receiving the pension will normally pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum or accessed through income drawdown.
If you die over the age of 75 whilst taking income drawdown, or with uncrystallised pension funds, the beneficiary will be able to access the pension funds flexibly, at any age, and pay tax at their marginal rate of income tax.
Pension drawdown therefore gives you and your dependants far more flexibility in making use of the pension funds. However, this comes at a price and the price is that you lose the guarantee that is provided by a conventional annuity.
If you chose the income drawdown option, we would recommend that in the event of your death your fund should be nominated to financial dependants. This nomination can be updated, if needed, in the future.
Inheritance Tax
By concession, HMRC would not normally impose inheritance tax on pensions.
HMRC / occurrence of death within two years of drawing pension benefits: possible additional tax charges
We are aware that HMRC currently maintains a policy of investigating any pension transfers/withdrawals that occur within 2 years prior to death. HMRC will seek to ensure that the implemented transaction was not arranged to avoid any tax on the pension benefits affected. If, in their view, the transaction was to avoid tax, they may seek to apply an inheritance tax charge to the benefits drawn at a level of a further 40%.
You should be aware of this current position before proceeding.
OTHER ISSUES / TAX
HMRC Lifetime Allowance / Lump Sum and Death Benefit Allowance: 2024/2025 Changes
Before the start of the tax year 2024/2025, there was an HMRC 'Lifetime Allowance' (LTA) for the maximum amount of all your pension savings. The LTA limit was £1,073,100 in the tax year 2023/2024, although the LTA tax penalty was removed, and has been abolished from the tax year 2024/2025 and replaced with the Lump Sum Allowance (LSA) of £268,275 and Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100. Those with HMRC protection may have had higher LTA limits applicable and these protections remain valid, providing they were in place prior to 15 March 2023.
Before the start of the tax year 2024/2025, testing of the LTA was carried out when benefits were drawn. How benefits were secured had an impact on how they were valued. Benefits were usually then tested again at age 75. From April 2024, only the non-taxable amounts of lump sums will be subject to a test against the LSA. Benefits above the LSA will be subject to tax at the individual's highest marginal rate.
For those who have drawn pension benefits prior to 06 April 2024, and therefore used part of their LTA, a standard calculation will be used to work out how much LSA remains. The LSA is reduced by 25% of the previously used LTA. This means that if 100% of the LTA was used prior to the tax year 2024/2025, the LSA is nil.
Importantly, however, where the actual amount of tax-free cash received was lower than the standard amount allowed, an individual may apply for a transitional tax-free amount certificate (TTFA). As an example, this may apply to those who have drawn benefits from a final salary/defined benefit plan that paid no, or minimal, tax-free cash. TTFA certification must be applied for and received before further pension benefits are crystallised.
You can see from the above that planning to draw the benefits from your retirement plans can be a complicated subject. Therefore, this text should not be treated as individual advice. Individual advice is only available based on your personal circumstances. A useful summary / pdf of this document is attached here.
We are qualified to provide bespoke advice on all areas of retirement planning, both for private and occupational pension schemes. We would be pleased to guide you with the objective of achieving greater value either through better terms or reduced taxation. The text above is based on our current understanding of legislation which can change. Please check that the rules detailed above are correct before making any financial decisions and seek individual advice in your circumstances.
This document is based on our understanding as at April 2024.
Legislation can and does change and you should check your individual position before taking any action
Chapters Financial Limited is not responsible for the content of external webpages.
Please note that this is for guidance only and that the information outlined in this document is not intended as personalised investment advice and may not be suitable for everyone. You should seek independent financial advice before proceeding further. The Financial Conduct Authority does not regulate taxation and trust advice.
Chapters Financial Limited is Authorised and Regulated by the Financial Conduct Authority.