With new pension freedoms you can chose how much of your pension you want to move into drawdown and although some have been planning for this since it was announced last year, many savers are still unsure. However, with careful planning the new rules have created huge opportunities to save tax through the generations. If you’re planning for retirement, here’s equilibrium’s tips on the new rules:
1. Don’t just think about the here and now
With instant access to cash, it can be easy to have a shopping list of treats: that new car, the holiday in the Caribbean you always planned to take in your retirement, maybe a new kitchen. Whilst it’s great to be able to enjoy the hard earned cash you’ve worked for, don’t get too giddy. Make a budget for spending and investments and stick to it. Think about what you want to achieve with your pension pot over the next five, ten and fifteen years.
2. Don’t forget tax
There are tax implications to pension draw down, taking large amounts of cash from your pension pot could pull you into a higher tax bracket. Depending on which option you take to access your cash, you could fall into an emergency regime which could lead to the HMRC taxing you incorrectly so you end up with less than expected, and the hassle of having to make a reclaim. To manage your tax bills it could be worth drawing down smaller amounts over a number of years instead of all in one go and also get advice on the best option for you. It’s also worth knowing the unjust ‘death tax’ is now dead and buried. Your estate will no longer have to pay 55% on your pension fund when you meet your maker. You will be able to pass on your pension fund to anyone you choose and pay no tax at all in doing it.
3. Don’t forget ISAs
If you are planning to release some money from your pension don’t forget your annual ISA allowance which is £15,240. Also, since the reforms, ISAs can be inherited tax free by a surviving spouse or civil partner on the death of the ISA holder. The spouse or partner, on top of their usual allowance, will be able to invest as much into their own ISA as their spouse or civil partner used to have.
4. Do take a personal approach
Do take a personal approach Investment planning is very personal, everyone has a different approach. To make the most of pension freedoms, think about your personal approach to risk – are you a risk taker, or are you more cautious? Your attitude to risk will impact which retire plan you should consider. A cautious saver should stay away from volatile investments, whereas a risk taker could be attracted to the high yields which could be achieved with careful planning.
5. Do plan for inheritance tax
It’s important to remember inheritance tax (IHT), there is a risk that pensioners who take all their money out of their pension pot could face a hefty IHT bill. Currently, you can pass on untouched pension savings to a loved one, but if you withdraw this money before you die, it becomes part of your estate – which could be taxed at 40 per cent. If you are planning for future generations it’s important to look at the IHT implications of your actions now.