PENSION TIPS

If you are employed, do take advantage of the Workplace Pension your employer is required to offer – even if you will be working only a few years. Currently you are required to contribute 5% of your pay and your employer must contribute a further 3%. The Government also adds an additional amount in the way of a tax rebate. For a person paying the 20% basic rate of tax, for every £4.00 they put into their pension, they end up with approximately £8.00 in their pension pot. In other words they have doubled their money – not a bad deal! For a person paying higher rate tax, the return is even better. The Workplace Pension is, effectively, a pay increase and should not be ignored.

Besides being a pot of money to use from age 55 onwards, a pension policy also provides a useful source of life assurance. Should you die before you take your pension benefit, the value will be paid to whomever you have nominated as the beneficiary. If your death is before age 75, the beneficiary will receive the value of your pension fund free of all taxes. If you die age 75 or older, the beneficiary will receive the pension fund value subject to the beneficiary’s level of tax. Note: do remember to fill out a Nomination of Beneficiary form for any pension you have so that the money goes to whoever you really want it to go to!

Do keep in mind your options from age 55 (currently): 25% of the pension fund is available as tax-free cash; the balance is available as an annuity (guaranteed income) or can be left invested with the option to take an income from it whenever you choose. The annuity can be a lifetime annuity which pays out as long as you live, or a fixed term annuity which pays an income for a fixed number of years and then provides a guaranteed lump sum at the end of that term. Note: the income from an annuity will be taxed in the same way as if you had earned the income. And if you leave it invested, any money you withdraw from it subsequently, whether as occasional lump sums or a regular income, will also be treated as earned income and taxed accordingly.