Five retirement planning fundamentals
By Kirsten Hastings, 29 Feb 16
With the tempo of pension reforms unlikely to slow, there are sure to be new pitfalls to avoid. But according to St James’s Place there are five retirement planning fundamentals that will remain. Use the arrows on the images below to find out what they are.
The chancellor will penalise anyone with pension savings above the lifetime allowance (LTA).
A million pounds may seem beyond the reach of most people, but a pension pot of this size is increasingly common. Moreover, from 6 April 2016, £1m is the maximum the chancellor will allow anyone to have in their pension before the excess is taxed at 55%. The limit is called the ‘lifetime allowance’ and it is, in effect, a ceiling beyond which pension savings should not be allowed to rise.
The LTA applies to the total of all the pension savings you have, including any final salary schemes you belong to, but excludes your state pension. Obviously, the LTA doesn’t affect everyone; but for thousands of workers, including middle managers, teachers, and doctors, a combined pension value of £1m is not unachievable at retirement.
What’s more, responsible savers in their 30s and 40s with relatively modest pension pots could expect to reach the LTA by retirement, given a run of good investment returns.
If the LTA is a concern, there are alternative ways of saving for retirement. For example, rather than continuing to fund your own pension, you could think about using your income to fund someone else’s pot – for instance, that of your spouse or partner.
Alternatively, Isas can provide a tax-efficient home for surplus income and, for the more advanced investor, there are venture capital trusts and enterprise investment schemes to consider.
If the value of all your pension pots exceeds £1m on 6 April 2016, then you should speak with your financial adviser about stopping contributions and applying for special protection that could shield the excess capital from tax charges.
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