And for my next trick... Pension plans

Pensions, although much maligned in recent years, are a great tool to individuals for many reasons, in particular since Pension freedom rules came into force.                                                                               

One of the purposes of my article was to try and clear some of the fog around the negativity on Pensions, however, this needed to be ”tweaked” slightly following the Spring Fiscal Statement in March 2023 when the Chancellor of the Exchequer pulled another Pension rabbit out of his hat by removing the Lifetime Allowance which had been a bone of frustration for many Financial Advisers for quite a few years.  Of course this made many headlines, but with Pensions there are still many benefits that are worth reminding of, some of which were also “tweaked” in the Fiscal Statement.

One of the traditional benefits of Pension contributions is the Income Tax relief.  On employee Pension contribution the Government provides Income Tax Relief at 20% which is added into the Pension.  Tax Relief is available at an individual’s marginal Tax Rate, meaning that Higher Rate and Additional Rate Taxpayers receive an additional 20% and 25% Tax relief in addition to the 20% Tax relief at source.  

Another change in the Fiscal Statement was the increase to the Annual Allowance i.e. the amount an individual can contribute to a Pension per Tax Year, from £40,000 to £60,000 for those who are not affected by the tapered Annual Allowance.  This was also increased, however to explain this would use up the majority of my word count for this article!

Pension Plans also offer a broad variety of investment options including Collective Funds, Stocks & Shares, Fixed Interest and Commercial Property.  This means that an individual can invest according to their own personal attitude to risk and individual circumstances to help to grow the “pot” in line with their ultimate objectives.

At retirement of course now an individual does not need to do anything with their Pension and can instead leave the value of this Pension outside of their Estate for Inheritance Tax purposes.  Some Pension Plans also provide the option of Beneficiary Flexi-Access Drawdown, meaning that their Beneficiaries can also keep the money in the Pension “wrapper” and retain  the same Tax benefits.  However, should Pension income by required in retirement then under a Pension, a Lump Sum of up to 25% of a Defined Contribution Pension Plan is available to the individual, albeit this can now be “drip fed” as regular income as opposed to be taken as a one-off lump sum.   It should be noted that this Tax Free Cash Lump Sum will remain at 25% of the current Lifetime Allowance, i.e. £268,275. 

Other Drawdown options include Uncrystallised Funds Pension Lump Sum (UFPLS) whereby you withdraw a combination of Taxable and Tax Free Income along with traditional Income Drawdown, meaning there are many ways to take income to meet an individual’s own Tax position in retirement.  

Pensions are also available to access from age 55 – increasing to age 57 on 6 April 2028 which means that an individual has the opportunity of going in to retirement flexibly without having to wait for their State Pension to commence.

In consequence there are many benefits available under a Pension and they should not be viewed in quite a negative light and can be an excellent option for all individuals.  

Hopefully this has removed some of the “smoke and mirrors” from Pensions and highlights some of the many benefits they have. If you would like further information on Pension Plans and the options available to you please do not hesitate to contact me.