20th February 2015 at 4:56pm
There’s little more than a month to go before the new pension freedom becomes reality. With the rules changing from April 6th there’ll be no limits or restrictions on how much income you can take.
Whether you’re saving for your retirement, or about to retire, the savings reforms announced in the 2014 Budget could give you more freedom, choice and flexibility than ever before over how you access your savings.
The greater freedom and control of your money as a result of the savings reforms means now is the time to make the most of your pension savings. There’s never been a better time to consider saving into your pension, so we’ve put together some compelling reasons why you might want to boost your pension pot before the tax year end.
1) Over 55? – Immediate access to your pension
- New flexibility from April 6th means that if you’re over 55 you’ll have the same access to your pension savings as you do with your other investments. With the combination of tax relief & tax free cash, pensions can be one of the most effective ways of saving for retirement as you approach 55.
2) Providing for your loved ones
- From April, new death benefit rules mean that pensions will become an extremely tax efficient way of passing on wealth to your family. Typically there’s no inheritance tax payable on death and there’s the opportunity to pass pension funds onto any family members tax free if you die before age 75.
- If you have other savings, you may want to consider moving them into your pension to shelter from any potential inheritance tax and benefit from tax-efficient investment returns.
3) Get a bonus from your employer?
- Consider putting part of your bonus into your pension – the mixture of tax relief and possible additional employer contributions can turn a small contribution into a significant pension contribution. Additionally this may contribute to recovering personal allowance or avoiding the child benefit tax charge.
4) Avoid the child benefit tax charge if you earn around £50 – 60k
- The child benefit is worth £2,475 to you if you are part of a family with three kids. You could ensure that the value of this child benefit is saved for your family by increasing pension contributions. Any pension contribution effectively reduces your taxable income – so if you reduce this to under £60,000 the tax charge can be partially avoided, and under £50,000 it can be fully avoided.
5) Over 55, still working and want to access your pension savings but protect your contribution levels?
- Bear in mind that, from April 6th, taking more than your tax-free cash will normally reduce the amount that can be paid into your pensions to £10,000 a year. This can be a problem if you’re still earning and plan to make significant contributions – the £10,000 limit applies both your contributions and your employer’s. You can take your tax-free cash, normally 25% of your pension pot, without any impact. But check this limit isn’t going to be a problem before taking more.
It’s worth remembering with any investment the value of your investment can go up and down and may be worth less than what was paid in. Also, laws and tax rules may change in the future and the information is based on our understanding at 03/2015. Your personal circumstances also have an impact on tax treatment.
The bigger, better ISA
We know these tips will provide some great pension perks for the 55s and over, but what if you don’t fall into this bracket? ISAs are still a great way to get all the flexibility and many of the tax advantages we’re about to see come into play for pensions.
New ISA rules were introduced last year, giving savers more flexibility and a larger tax-free allowance than ever before. Four out of 10 people told the consumer organisation Which? they would save more as a result of the annual limit increasing to £15,000, up from £11,880.
What sets ISAs apart from other savings and investment accounts is that any interest on cash savings or gains from investments are tax free.
- You pay no tax on the interest you earn in a Cash ISA
- With a Stocks and Shares ISA you pay no capital gains tax on any profits and no tax on interest earned on bonds.
Both will give you the flexibility that pensions now can; you’ll be able to dip in and out of your savings as needs require – they can work just like a savings account.
You’ve also the added benefit of when you do hit 55 or choose to retire you can move your ISA into your pension and enjoy all the benefits we’ve highlighted.
The savings landscape is evolving and we can all potentially benefit as a result. These welcome changes to pensions and to ISAs can give us flexibility, tax efficiency and access to our cash in ways no previous generations have enjoyed.