19/11/14A great combination?
My apologies…its been a while. As I’m a person who lives to eat (as opposed to eating to live), if I can find a way of linking food to Financial Services, I will. so, here we have a quintessential staple of the American diet (my personal favourites I have to say!) so what has this got to do with Financial Services I hear you ask? (you are wondering this, aren’t you?!) Well…..assuming Royal Assent is given, in April 2015 those over 55 can access their pension pot in its entirety and as Steve Webb put it, ‘can go and buy a Lamborghini’
Now that’s not the greatest advice from a pensions minister-but-it demonstrated that someone could take it all..in other words, have all the Jam & Butter….if you do that however, you’re just left with…..peanuts.
It’s also worth bearing in mind that if you do take your pension fund in total, 25% is available tax free but the 75% would be taxed at your highest marginal rate…so if we take a pension pot of £50,000: £12,500 would be paid tax free, but £35,000 would be taxed as earnt income.
Lets imagine its March 2016 and laws have been passed.You’ve decided to retire from your £12,000 per annum job and you have a pension pot with £50,000:
from your job and using the fiscal year, you have received £11,000 of income. you take £12,500 as tax free cash, but you also require the £35,000 that remains. For tax purposes this is added to the £11,000 earnt income, making total earnings for that tax year £46,000, making you a 40% tax payer. Perhaps far better, instead of taking £35,000 in one lump sum, split it in two and pay 20%.
The most important thing is what you’re genuinely going to do with it once you’ve removed it? The whole point of saving via a pension is to provide you with income when you are either no longer working or perhaps you’ve reduced your working hours…
Traditionally, a pension scheme would have let you purchased an annuity…a spreadbet insurance policy, gambling on the fact you’ll die at or before an actuarial decided age-that’s from the annuity providers perspective. From a purchasers perspective, it is a guaranteed income for the rest of their life, regardless what may happen in the investment markets. Some like this, a lot didn’t hence the introduction of Income drawdown-a hybrid that lets you drawdown an income, whilst still being invested in investment markets, allowing you take advantage of potential market gains.
So now, with the chancellors declaration of ‘never having to purchase an annuity’ (which was weird, considering you haven’t had to do so for a number of years) apparently means you have to choose one or the other…I say both…have the Peanut butter & Jam…..
Purchase an annuity to help cover the ‘hardcore’ expenses (utilities, council tax, insurances etc) and use the remainder in drawdown, so you can pull out excess income to help fund holidays etc, whilst you are fit & healthy. Then, as we get older, our lifestyle expenses may reduce, but our medical bills may go up. Funds in drawdown could be accessed to cover the costs, or to ensure you don’t run out of money, another annuity could be purchased and as you’re perhaps reliant on medication, the rate of the annuity could be enhanced, so you have another fixed level of income.
Clearly retirement is much, much more than just a decision at the metaphorical ’65’yrs of age. It is a process that needs reviewing annually-however big or small your retirement pot is-to ensure its preserved throughout your life, and ensuring you have more than peanuts when you need it most.
If This blog has caused you to stop & think, then have a look at my website:
www.business-ifa.co.uk for more information about myself and services…my first meeting is always free and there is no obligation at all
See you next time.