Understanding how your pension works is important to ensure you will have enough wealth to be able to live your desired lifestyle.
Recent research by Aviva, stated that more people are saving into their pensions than ever before however they don’t fully understand the rules surrounding these investments.
Having enough wealth to have a comfortable and sustainable retirement
Understanding how your pension works is important to be able to make properly informed decisions and ultimately grow your pensions wealth effectively.
It’s important to know how much you can tax-efficiently contribute into your pension each tax year (6 April to 5 April). In the 2021/22 and 2022/23 tax years, this stands at £40,000 or 100% of your earnings, whichever is lower.
Tax relief is a great way to help grow you pension pot so it is important to understand how it works and how much you can claim.
Whenever you make a contribution, some of the amount that you would normally have paid in tax is transferred directly into your pension instead. The amount that you can receive depends on the rate of tax you pay, meaning that if you’re:
- A basic-rate taxpayer, you’ll receive 20% tax relief on your contributions
- A higher-rate taxpayer, you’ll receive 40% tax relief on your contributions
- An additional-rate taxpayer, you’ll receive 45% tax relief on your contributions.
However, only the basic rate of relief is added to your pension automatically. If you pay the higher or additional rate of tax, you’ll have to complete a self-assessment form in order to claim the extra 20% or 25% that you’re entitled to.
Lifetime Allowance is also something to be aware of, which is the total amount that you can save into your pension tax-efficiently. In the 2021/22 and 2022/23 tax years, this stands at £1,073,100 and covers the total value of all your pension assets including both defined contribution and defined benefits schemes.
When the time comes to draw from your pension, or at age 75, a Lifetime Allowance test will be applied. If the value of your combined pensions is greater than the limit, you may have to pay a charge on the value above the threshold.
You may also be liable for a tax charge of 55% of any excess taken as a lump sum or 25% of the excess if taken as regular income.
Avoid the risk of running out of money by making sustainable withdrawals
Many people are worried about running out of money in retirement, however, this can be carefully planned out. For many years, the rule of thumb for pension withdrawals was that 4% was a sustainable amount to take out of your pot each year. However, market conditions have significantly changed so this might not be applicable.
Knowing how much you can sustainably withdraw from your pension can help to give you a much greater sense of confidence that you won’t run out of money in retirement.
Why working with us can help you make more informed decisions
If you want to enjoy a comfortable retirement, then speaking with us could be very helpful. It can really help to ensure that you make the most of your allowances to build your retirement pot in the most effective way possible. It can also help if you are nearing your Lifetime Allowance to avoid triggering any tax charges that may eat into your wealth.
Working with us can help you to find a sustainable annual withdrawal amount, giving you more peace of mind that you won’t run out of money in retirement.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Your pension income could also be affected the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.