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.
Unexpected tax bills are a potential pitfall of new pension freedoms and highlight the need for advice when preparing for retirement.
Since new pension freedoms were introduced in April 2015, retirees no longer have to buy an annuity with their pension pot, but can take benefits in a variety of ways. This includes the option to keep the pension invested in retirement and/or withdraw cash as required. However, freedom has given rise to hidden dangers and increased the likelihood of people making poor decisions.
One danger is that people find themselves unwittingly pushed into higher rate tax bands by cashing in too much of their pension in a single tax year. For example, if a £250,000 pension was taken as a lump sum in the current tax year, the tax bill would be over £70,000, even if the individual had no other earnings – and despite the fact that a quarter of the withdrawal is tax-free.
Retirement is a time to ensure that benefits accumulated over a lifetime are taken back tax-efficiently. The tax-free personal allowance – an amount of income you can have before you pay tax – can play a key role in keeping tax bills down. Most people in the UK get a personal allowance; this is currently £10,600, but it will be increased to £11,000 for the 2016/17 tax year, and to £11,200 for 2017/18.
Instead of taking a large withdrawal in a single tax year, you could spread it over two or more tax years, utilising more than one year’s personal allowance and reducing your overall tax bill. Better still, if you have a partner or spouse, you could have a combined tax-free allowance of £21,200 for 2015/16, and £22,000 for 2016/17.
Therefore, if you have the ability to do so, it’s prudent to ensure that your partner’s pension is fully funded, as well as your own.
On top of increases to the personal allowance, the basic rate tax limit will be increased to £32,000 for 2016/17 and £32,400 for 2017/18. Similarly, the higher rate threshold will be £43,000 in 2016/17, and £43,600 in 2017/18, providing more scope to obtain tax-efficient income.
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