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Retirement
Guide to Retirement Planning
What is Retirement Planning?
Tax Incentives
There is not a long time before I wish to retire
When can I retire?
Do I have to retire at age State Pension Age?
When I draw my Pension must I buy an annuity?
What is Retirement Planning?
It is generally accepted that retirement planning is about
ensuring that you have sufficient financial resources to enjoy
your retirement. Although most attention is placed on the
provision of a pension, it is also wise to consider the timing of
debt repayment to ensure the majority is repaid before you retire.
This is especially important on any mortgage on your home.
Over recent years there has been considerable political comment
and press coverage regarding the level of the State Retirement
Pension. Large numbers of people believe that they will require
more money after their retirement than the state pension can
offer.
These feelings often lead to people beginning their long term
planning with regular contributions into a pension scheme. Pension
planning is normally a long-term commitment. The Government is
trying to encourage more people to build up a pension fund of
their own with the introduction of Stakeholder Pensions and
changes to Contracting Out from the State Earnings Related
Pensions (SERPS) or the State Second Pension (S2P).
In addition to considering your income in retirement, you may
wish to consider provision of Health cover, or perhaps plan for
how you are going to provide for your dependents.
You may even want to think about planning the effects of
Inheritance Tax on your Estate and consider whether it would be
wise to transfer a portion of your current assets to your children
or grandchildren.
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Tax Incentives
Pension funds in the UK benefit from significant tax
incentives. These include allowing for any growth in the value of
the pension fund to be free of tax. Also the current rules provide
that a portion of the pension fund may be drawn in the form of a
tax-free lump sum. Additionally any contributions made to the
pension fund by either you, or your employer, will qualify for tax
relief.
Those people who pay income tax at the basic rate will receive tax relief at this rate reducing
the real cost of any pension contribution (e.g. a £100
contribution will actually cost you £80 due to the tax relief
available). Where contributions are made to Stakeholder or
Personal Pension plans the tax relief is granted at source,
meaning that you actually pay the net amount due, and the pension
company reclaims the amount available in tax relief directly from
the Inland Revenue. Tax relief up to 50% is available for those
people that are liable to pay income tax at the higher rate. Those
with Stakeholder or Personal Pensions must claim their additional
tax relief from the Inland Revenue this can be done via the annual
tax return. .
If you are less certain about the timing of your retirement you
may wish to consider savings using products other than Pension
Plans then you may find the tax efficiency of ISAs very
attractive. Savings into Unit Trusts/OEICS or Shares can be very
tax efficient for those people who make proper use of the
exemptions available under the current rules of Capital Gains Tax.
This may be an area where you wish to seek advice from us.
Savings into share based assets such as unit trusts/OEICS or
stocks and shares ISAs are normally considered to be most suitable
for those people who wish to save for the medium to long term.
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There is not a long time before I wish to
retire
Even if you do not have a long time to save for your retirement
you should still consider retirement planning. There have been
many changes to the charging structures applied by the Pension
Providers. This means that even if the period until your
retirement is quite short you could still get a good overall
return on the money you invest. Investment returns can fluctuate
and cannot be guaranteed.
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When can I retire?
Many people focus their planned retirement to coincide with
ages 65 (men) or 60 (women). This tends to be for historic
reasons, based on the age at which people can claim their State
Retirement pensions. Recently the State Retirement age for all
women born after 6th April 1955 has been changed to 65, the same
as for men. No change was made to the state retirement age of
women born before 6th April 1950.
If you intend to retire before the State Pension age,
additional planning is normally required. This is necessary as you
will be unable to claim your state pension until you do reach
State Pension age. Therefore those who are considering retiring
before state pension age often have a greater need to make long
term plans to provide a sufficient income at the time they wish to
stop working.
If you are making private pension provision, or are a member of
an occupational pension scheme, then under normal circumstances
benefits cannot be drawn form the pension plan unless you are aged
55 or over (men or women). Special
rules apply to those who have to retire due to serious ill health.
There are some occupations where special reduced retirement
ages operate. This allows the benefits of a pension plan to be
drawn prior to age 55. Normally
reduced retirement ages apply to employments like professional
sports people, or some types of Financial Dealers.
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Do I have to retire at age State Pension Age?
You are under no obligation to retire at the State Retirement
Age. If you want you can delay the drawing of your state pension.
During the period that you defer receiving your State Pension it
will be increased, so that once the pension is started the weekly
payment will be higher than would have been the case at your State
Pension Age.
The start date of receiving benefits from Private Pensions
cannot normally be extended beyond age 75. Whether the delay in
the start of the pension payments will result in a higher income
being paid to you will depend on the terms of your particular
pension plan. You should contact us for assistance.
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When I draw my Pension must I buy an annuity?
A pension annuity is bought by using your pension fund, at the
time you retire, to provide an income in retirement.
Many private personal pension plans now allow you to draw your
benefits at the time you wish to retire but do not force you to
purchase an annuity. Your income is provided by making withdrawals
directly from the pension fund which remains invested. Under
current rules you can defer the purchase of an annuity until the
time you reach age 75.
If you wish to investigate the option of deferring the purchase
of your annuity when you retire please
contact us for assistance.
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