In a time where returns on cash savings are at an all time low its as important as ever to try and maximise the returns on your hard earned money so you can enjoy retirement.
Pensions might seem complicated, but the basic idea is a simple one. A pension is simply a long-term savings plan in which your contributions are topped up by the government. So effectively free money! For example if you were to contribute £100 into a pension the government would add an additional uplift of £25 for a basic rate tax payer. You can claim even more relief if you are a higher rate or additional rate tax payer via your self-assessment. What are the other advantages of paying into a pension I hear you say? Well, there are many!
1.Tax Free Entitlement
When you’re eligible to start taking money out of your pension – usually from age 55 (57 from 2028) – up to 25% of its final value can be taken as a tax free lump sum.
2.Immediate tax advantages on your investments without any investment risk
Once contributions are invested, they grow largely free of taxes.
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
25% can be drawn tax free
£900
Leaving
£2,700
Withdrawal after the deduction of basic rate tax (20%)
£2,160
Amount received in hand
£3,060 (£900 tax free + £2,160 net income)
Return
6.25%
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
25% can be drawn tax free
£900
Leaving
£2,700
Withdrawal after the deduction of tax (0%)*
£2,700
Amount received in hand
£3,600 (£900 tax free + £2,700 income)
Return
25%
*Assumes the client is a non tax payer
The above assumes no investment growth at all! If you decided to invest the funds the returns could look even better!
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
Fund value after investment growth of 10.80%*
£3,988.80
25% can be drawn tax free
£997.20
Leaving
£2,991.60
Withdrawal after the deduction of basic rate tax (20%)
£2,393.28
Amount received in hand
£3,390.48 (£997.20 tax free + £2,393.28 net income)
Return
17.73%
*Assumes an annualised return of 10.80% from the FAL Hybrid Moderate 2021/22 portfolio
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
Fund value after investment growth of 10.80%*
£3,988.80
25% can be drawn tax free
£997.20
Leaving
£2,991.60
Withdrawal after the deduction of tax (0%)**
£2,991.60
Amount received in hand
£3,988.80 (£997.20 tax free + £2,991.60 income)
Return
38.50%
*Assumes a annualised return of 10.80% from the FAL Hybrid Moderate 2021/22 portfolio
**Assumes the client is a non tax payer
The usual caveats apply with investments, your capital is at risk. The value of your investment can down as well as up, and you may get less back than you invest. Equally poor portfolio returns could lead to the loss of the tax uplift.
3.Flexibility in how your access your Pension
Flexi-Access Drawdown allows you to withdraw as much or as little retirement income as you wish, while choosing how the remainder of your fund is invested. This is just one of the options available, you can still opt to buy an income for life if you wish
4.Potentially no inheritance tax on death
With defined contribution pensions, your pensions can be passed on to your beneficiaries without being included in your estate for inheritance tax purposes
5.Flexible Death Benefits
Your beneficiaries will normally have the choice of taking the pension fund as a lump sum or leaving the fund invested and using it to provide an income if needed. If invested they can take income as and when required offering far more flexibility. Any funds left invested will continue to benefit from being a in a tax efficient arrangement.
As ever, if you have any questions or wish to discuss this further then please contact us.
This information should not be regarded as financial advice.
Pensions might seem complicated, but the basic idea is a simple one. A pension is simply a long-term savings plan in which your contributions are topped up by the government. So effectively free money! For example if you were to contribute £100 into a pension the government would add an additional uplift of £25 for a basic rate tax payer. You can claim even more relief if you are a higher rate or additional rate tax payer via your self-assessment. What are the other advantages of paying into a pension I hear you say? Well, there are many!
1.Tax Free Entitlement
When you’re eligible to start taking money out of your pension – usually from age 55 (57 from 2028) – up to 25% of its final value can be taken as a tax free lump sum.
2.Immediate tax advantages on your investments without any investment risk
Once contributions are invested, they grow largely free of taxes.
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
25% can be drawn tax free
£900
Leaving
£2,700
Withdrawal after the deduction of basic rate tax (20%)
£2,160
Amount received in hand
£3,060 (£900 tax free + £2,160 net income)
Return
6.25%
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
25% can be drawn tax free
£900
Leaving
£2,700
Withdrawal after the deduction of tax (0%)*
£2,700
Amount received in hand
£3,600 (£900 tax free + £2,700 income)
Return
25%
*Assumes the client is a non tax payer
The above assumes no investment growth at all! If you decided to invest the funds the returns could look even better!
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
Fund value after investment growth of 10.80%*
£3,988.80
25% can be drawn tax free
£997.20
Leaving
£2,991.60
Withdrawal after the deduction of basic rate tax (20%)
£2,393.28
Amount received in hand
£3,390.48 (£997.20 tax free + £2,393.28 net income)
Return
17.73%
*Assumes an annualised return of 10.80% from the FAL Hybrid Moderate 2021/22 portfolio
Investment of £2,880 net
Increased to £3,600 after the addition of tax relief
Fund value after investment growth of 10.80%*
£3,988.80
25% can be drawn tax free
£997.20
Leaving
£2,991.60
Withdrawal after the deduction of tax (0%)**
£2,991.60
Amount received in hand
£3,988.80 (£997.20 tax free + £2,991.60 income)
Return
38.50%
*Assumes a annualised return of 10.80% from the FAL Hybrid Moderate 2021/22 portfolio
**Assumes the client is a non tax payer
The usual caveats apply with investments, your capital is at risk. The value of your investment can down as well as up, and you may get less back than you invest. Equally poor portfolio returns could lead to the loss of the tax uplift.
3.Flexibility in how your access your Pension
Flexi-Access Drawdown allows you to withdraw as much or as little retirement income as you wish, while choosing how the remainder of your fund is invested. This is just one of the options available, you can still opt to buy an income for life if you wish
4.Potentially no inheritance tax on death
With defined contribution pensions, your pensions can be passed on to your beneficiaries without being included in your estate for inheritance tax purposes
5.Flexible Death Benefits
Your beneficiaries will normally have the choice of taking the pension fund as a lump sum or leaving the fund invested and using it to provide an income if needed. If invested they can take income as and when required offering far more flexibility. Any funds left invested will continue to benefit from being a in a tax efficient arrangement.
As ever, if you have any questions or wish to discuss this further then please contact us.
This information should not be regarded as financial advice.
