ABOUT PENSIONS
Why do you need a pension?
How pensions work
You make contributions to an insurance company to help fund your retirement. The insurance company invests these contributions in a range of different investments to build up a sum of money over time. This sum then provides a retirement income later in life
How tax relief works
As a basic rate taxpayer - If you wanted to invest £100 in your plan, you need only contribute £80 and the taxman will contribute the other £20.
Tax benefits
You make contributions to an insurance company to help fund your retirement. The insurance company invests these contributions in a range of different investments to build up a sum of money over time. This sum then provides a retirement income later in life
• Any contributions you make to a pension receive basic rate tax relief, even if you don't pay tax. For every £1 you invest, the taxman puts in another 25 pence.
• If you pay higher rate income tax, you can reclaim extra tax relief through your self-assessment form.
• Once invested, your savings grow virtually free of tax.
• If you die before taking your retirement benefits, your husband, wife, civil partner or dependants don't normally have to pay tax on any lump sum they receive.
All these tax benefits help you build a better retirement. Tax treatment depends on individual circumstances and may be subject to changes in the future.
A few restrictions: Not surprisingly given such generous allowances, there are some restrictions to ensure that the system isn't abused. For instance, there's a limit on tax relief. Each year, it's available on contributions you make into a pension up to the greater of £3,600 or one hundred per cent of your earnings (this includes the tax relief).
People with no earnings, such as full-time carers or children, can still pay in £3,600 a year (inclusive of tax relief) or have this amount invested on their behalf. Your employer can also make contributions to an individual pension for you.
There is a tax charge of forty per cent on any contributions, including those made by your employer, above a maximum level each tax year. This is known as the Annual allowance. The forty per cent charge applies only to the amount in excess of the Annual allowance, not to the full contribution.
Basic State Pension
This provides a flat rate payment to those who have met the minimum National Insurance Contribution requirements. In the current tax year (2014/2015), the Basic State Pension is £113.10 a week for a single person and £180.90 a week for a married couple.
Taking your benefit
When you take your retirement benefits, you can choose from a range of flexible options that allow you to tailor your income to your needs.You can start taking retirement benefits from age 55 (even if you're still working). If you become severely ill, you may be able to take your retirement benefits earlier.
State Second Pension
The State Second Pension (S2P) is an earnings-related pension that replaced the former State Earnings Related Pension Scheme (SERPS) in April 2002. It's designed to top up the Basic State Pension and is based on earnings, providing most benefit to those on low incomes.
Taking tax-free cash
Once you are 55 you will be able to take up to a quarter of the fund value as tax-free cash. You don't have to start taking an income at the same time. Taking tax-free cash will reduce the income that your plan can provide.
Annuities
An annuity is a financial product that provides a guaranteed retirement income for life in return for a lump sum payment.
Taking income
You can take a regular income in a number of ways. Typically, this involves using the money you've built up in your plan to purchase an annuity. An annuity is a financial product that provides a guaranteed retirement income for life in return for a lump sum payment. It's also possible to take an income directly from your retirement fund and leave the rest invested. Whichever way you receive your income, it will be subject to tax
Lifetime allowance
There is a limit on the amount you can have built up in this and any other pension plan when you start taking your retirement benefits. It is set by the Government and is known as the Lifetime allowance - if you exceed it, the excess will be subject to a tax charge.
Introducing Income Release
Once you're 55, you can take tax-free cash and an income directly from your plan: this facility is called Income Release.
First things first, speak to an adviser at Hemisphere Financial Ltd.
How Income Release works
To access your retirement benefits you first need to select all or part of your Pension Portfolio for Income Release, as long as you have a minimum of £20,000 in your Core Investments. You may select any proportion of your plan depending on the benefits you wish to take. If you select less than one hundred per cent of your pension for Income Release, the plan will be made up of two separate accounts - the Income Release Account and the Savings Account.
The income payments from your plan are not guaranteed for the rest of your life so it's important to regularly review the level of income taken and the value of your fund to ensure it's sustainable. You should also remember that the value of your investment could go down as well as up so you could get back less than your original investment.
Annual and lifetime allowances – A Quick Guide
There's a limit to the amount you can invest in pension plans every year before you are taxed on your contributions. It's set by the Government and it's called the annual allowance.
It's not as easy as counting the contributions you make in the tax year, 6 April to the following 5 April. It's the contributions you make during what's known as a pension input period (PIP) that count. This may be the same as the tax year, but it may not, so you should check with your financial adviser or pension provider who will tell you what your PIP is.
The annual allowance has reduced from £50,000 to £40,000 for PIPs ending on or after 6 April 2014. This means that contributions made in the 2013/14 tax year could be tested against the £40,000 annual allowance. For example, if the PIP currently runs from 1 May 2013 to 30 April 2014, any contributions made from 1 May 2013 will be tested against the £40,000 annual allowance as this ends in the 2014/15 tax year. However, if the PIP ended on 5 April 2014, the contributions will be tested against the £50,000 annual allowance as this ends in the 2013/14 tax year.
Lifetime allowance
There's a limit to the amount you can have built up in any pension plan when you start taking your retirement benefits. It's set by the Government and it's called the lifetime allowance. The lifetime allowance for 2014/15 is £1,250,000.