Pension Awareness Week: Is your pension working for you?
To say pensions are important in supporting people in later life is an understatement. It’s essential to take control of your pension as early as possible and take decisive action towards securing a happy and financially comfortable retirement.
As part of Pension Awareness Week 2023, we have put together a rundown of the latest pension updates and some important aspects to consider as part of your planning.
The Spring Budget 2023: don’t miss out on the freebies
In March this year, the ‘Budget for Growth’ set out some substantial updates for pensions. Chancellor Jeremy Hunt announced a significant increase in the annual pension allowance from £40,000 to £60,000. The annual allowance represents the maximum amount of pension savings an individual can make each year (subject to earnings) without an annual allowance charge applying; a £20,000 increase is not an insignificant shift for many.
Higher earners benefit from no annual allowance tapering up to an adjusted income of £260,000. There will be no lifetime allowance charge — the total amount of pension benefits you can build up in your lifetime — in tax year 2023/24, and the lifetime allowance is to be abolished from 6 April 2024.
Savers will continue to benefit from uplifts on their own personal contributions in the form of a 20%/40%/45% tax relief, depending on their marginal rate of income tax, with the option to carry forward unused allowances from the previous three tax years.
Pension funds can also grow free of any income or capital gains tax within the pension wrapper. Earlier this year, we produced a more comprehensive Spring Budget 2023 rundown, which is available here: https://www.7im.co.uk/private-client/news-views/spring-budget-2023-the-devil-is-in-the-detail. It is important to remember that any tax treatment will depend on your individual circumstances and may be subject to change.
Decades of National Insurance contributions could make little impact
Having a big enough pot could mean the difference between a stringent ‘counting-the-pennies’ and a prosperous retirement. Even though the UK government has increased the state pension to £203.85 per week, this allowance may not be enough for you to fulfil your travel dreams or hobbies while in retirement.
To avoid falling into this scenario — particularly those who have contributed to various pots throughout different job roles — it is extremely important to keep track of your pension savings. The Association of British Insurers estimated in October 2022 that the value of lost pension pots in the UK had increased to £26.6bn, and in the four years leading up to the time of this data, there had been a 75% increase in the number of lost pension accounts.*
There are several options available to help locate previous pension plans, and the financial planning team at 7IM can assist in reviewing these plans to determine whether they continue to meet your needs.
Managing your pensions
Tracking down your missing pension savings and consolidating them should be a top priority, otherwise some of your hard work and dedication throughout your working life has contributed to the £26.6bn pot of lost pensions.
It can take time and energy to track down your pension plans, and you may be unclear on the charges, investment options, any valuable benefits, or retirement options that they offer. But over a matter of decades, a poorly managed pension portfolio could cost you thousands, if not hundreds of thousands.
Understanding all your retirement options can feel overwhelming, but it doesn’t have to be. The 7IM financial planning team can review this information for you and help explain, in plain English, exactly what is going on under the bonnet.
Knowing how your pension is invested and whether it’s cost-effective will play a crucial part in whether your money is working for you.
Your pension is your (tax-efficient, long-term) friend…
… so don’t turn your back on it. Remaining invested for the long term remains essential and a key message that we at 7IM never get tired of emphasising. Investments within a pension pot grow free of income tax; when coupled with the upfront tax relief achievable in most instances, they hugely enhance the value of the savings you can access down the line.
You can typically take up to 25% of your pension pot free of income tax at normal retirement age, subject to lifetime allowance limits. This might allow you to perhaps pay off liabilities, offer a gift to family, or buy that sports car you’ve been working hard for!
With “pension freedoms” introduced in 2015, a financial planner can help you draw down pension income as and when required, ensuring you are maximising your allowances.
Fail to plan, plan to fail
We hear Benjamin Franklin’s phrase quite often in our working lives, or when we plan a driving route, and there is a sense in which we can apply it to retirement planning.
What income will you need to generate from your pension to land a comfortable retirement? To charter a course towards financial freedom in later life, it’s essential to know what your goals might be and the financial tools you have at your disposal now.
From there, partnering with a regulated financial planner acting as your co-pilot as early as possible offers you and your family the assurance that you will be able to reach your destination, whatever this might mean for you.
We’ll do the work
The earlier you start planning for retirement, the better off you will be when you finally get there. To ascertain whether you are making productive use of the improved rules on pensions this year, leveraging 7IM’s Private Client Team’s comprehensive financial planning services could help your retirement go a long way.
We know how life can so often feel busy, and that’s why we have a team of Financial Planners. As seasoned experts in all things retirement, they aim to offer you peace of mind by ensuring your affairs and investments are managed and planned in the best possible way.