7 Reasons why you should review your Pension’s in 2016
by Alexander Beard, on Jan 20, 2016 6:54:45 AM
1 - Major changes to pension Tax Relief likely
We already know high earners will be hit from 6 April 2016. The amount they can invest in a pension and receive tax relief on will fall to as little as £10,000. You are likely to be affected if your income is more than £150,000, although those with lower incomes could also be caught.
But further changes are likely to be announced in the Budget on 16 March 2016 and we’re expecting fundamental and wide-ranging reforms affecting all pension savers. As tax relief is such a large expense and the majority currently goes to higher earners, we wouldn’t be surprised to see significant cuts. In particular, anyone earning more than £43,000 may wish to consider bringing forward their contributions.
2 - Lifetime Allowance Reduction
The lifetime allowance is a cap on the total you can hold in pensions. It will fall from £1.25m to £1m on 6 April 2016.
If you think your pensions, including any final salary schemes, will be worth more than £1m by the time you retire or reach age 75, whichever is sooner, you might be able to apply for protection. There are two types of protection and they could help you avoid tax charges of up to 55%.
It may be possible for some investors to make any planned contributions before 5 April 2016, apply for protection and make no contributions thereafter.
3 - Don’t Delay Saving for your Retirement
Quite simply, the longer an investor delays, the more it costs to build a good-sized pension. This is because of ‘compound interest’, which Albert Einstein called “the most powerful force in the universe”.
What’s the difference if the contribution was started at age 20, 30, 40 or 50? Roughly speaking, every ten-year delay wipes out approximately half of the fund’s potential growth.
Of course, these are only guidelines; the actual return could be less or more than this. The figures do not take account of inflation, which will reduce the spending power of money over time. Moreover, investments are not guaranteed: they go down as well as up in value so an investor could end up with less than they invest.
Everything being equal, the earlier an investor starts saving, the more potential their pension fund has to grow.
4 - Not Reviewing your Pension Savings
Relatively few people review their pension. Moreover, recent research reveals nearly three quarters of pension savers under 45 don’t even know the value of their investments.
Yet, not all investments are the same. Even a seemingly small difference in performance could have a significant impact on the size of the pot.
A 35 year old with a £20,000 pension pot could have a fund worth £26,871 at 65 if their investments grew by 2% a year. The fund might be worth £64,115 at 65 if their investments grew by 5% a year or £149,277 if they grew by 8% a year (assuming in all cases an annual fund management fee of 1%). Again, these are just projections. Investments will not always go up in value, they can also go down, so an investor could get back less than they invested. Also, these values do not account for inflation, which will reduce the spending power of money over time.
5 - Assuming the State will take care of you
For 2015/16 the state guarantees a minimum income of £151 a week for those who have reached State Pension age. From April 2016 the complex system of basic State Pension, additional State Pension and means-tested benefits will be replaced with a single-tier State Pension of the same amount (in today’s money). Can you afford to live on £151 per week
6 - Don’t put all your eggs into one basket
As the saying goes: an Englishman’s home is his castle. But it may also be his largest investment. If an investor decides to just use property as a retirement fund, they could be putting all their eggs in one basket.
Investment professionals agree diversification is key to managing risk, although it doesn’t guarantee an investor won’t make a loss. So, if an investor already has capital invested in property, it could make sense for them to consider diversifying and investing in different asset classes.
What’s more, the property market isn’t exactly “safe as houses” – as people who had to sell their home in 2008 and 2009 will testify.
The recent changes to Buy to Let property investments also reiterates the need for diversification.
7 - Shop around at retirement for the best deals
Rules have recently changed giving more choice and flexibility. Investors should explore all the options to make sure they choose the right option for them.
From age 55 (57 from 2028), up to 25% of a pension can normally be taken as a tax-free lump sum. After that, there are two main ways to draw a taxable income.
The first main option is buying an annuity from an insurance company, which provides a secure retirement income for life. If an investor chooses this option, they should shop around as rates can vary significantly. What’s more, there are over 1,000 medical and lifestyle conditions that could help increase the annuity income. It’s not only serious illnesses that qualify. Requesting an ‘enhanced annuity’ could result in thousands of pounds more every year.
The other main option is drawdown. The pension remains invested and the investor draws an income from it. It is more flexible – but it is more complex and the income is not guaranteed, so it is riskier. Income limits were removed in April 2015 so an investor can now take what they like out of their pension pots. They can even take the whole fund as a lump sum, but should remember it could result in a large tax bill and think carefully about how they will fund retirement.
Alternatively, an investor can take lump sums directly from their pension. This option was introduced in April 2015 and 25% of the lump sum will be tax free and the rest taxed as income.
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