Saving for retirement should be a priority for everyone. More than half of the UK population are either not saving at all for their retirement, or they are not saving enough to give them the standard of living they would like when they retire. However, for those of you who have put the process to one side, saving is lot easier than you may first think.
Pension schemes
Under auto-enrolment, it is a necessity for employers to offer a pension scheme to all employees, and unless a decision is made to physically opt out, they are signed up automatically. However, choosing not to join the scheme can mean employees miss out on pension contributions from their employer. This is now worth a minimum of 2% of an employee’s salary, then 3% in April 2019.
If self-employed, this support is not offered. However, if paying into their own private-pension scheme, the government can still offer them financial support. Self-employed individuals receive upfront tax relief at their marginal rate of tax. Dependent on the type of taxpayer, for example basic, higher and additional rate, payment costs will vary. For example, a £1000 contribution can cost £800, £600 and £550.
Tax relief for the majority of employees is available on pension contributions of up to £40,000 a year. Exceptions to the rule include not contributing more than you earn; other than a basic £3,600 annual limit. Furthermore, those earning more than £150,000 see their annual allowance reduced on a decreasing scale to £10,000.
Until the age of 55, employees are not able to access money paid into their private pensions. A wide range of options are available to employees through the pension freedom reforms of 2015. These include; consistently making contributions, transferring money to an income-drawn arrangement, or purchasing an annuity, which converts savings into regular income. 25% of savings are available tax-free, and combined with upfront tax relief, private pensions in comparison to individual savings accounts (ISAs) can be more rewarding.
Lower costs
To utilize this fully, it is essential employees choose the correct pension. It is vital they look at charges and the variety of investment funds available for access via the pension. A wider range of potential investments is typically provided by Self-invested personal pensions (Sipps). This variety is useful for those planning to take a hands on approach to managing their pension fund.
Securing better returns and paying lower charges makes a vast difference. For example, paying £1,000 a month into a fund that costs 1% a year and returns 5% annually will generate £682,000 over 30 years. A return of 7% over the same period would deliver £968,000.
However, the lifetime allowance limits the size of your pension pot. This is now £1.03m, with a cap applying to the total value of all savings in private pensions. Savings above this can incur tax, so stick to the rules!
Tax-efficient alternatives?
Investing in ISAs together with your pension makes sense. Building up savings is made easier, access is made simpler, and returns on ISAs are completely tax-free.
For high earning individuals who are concerned about breaching the annual lifetime pension allowance, Venture-Capital Trusts (VCTs) and Enterprise-Investment Schemes (EIS) are worth considering. Although operating in different ways, VCTs and EIS make similar types of investment. This similar investment is normally within small-early stage businesses, where the government believe investors need an incentive to provide risky support.
VCTs are investment companies that are listed on the London Stock Exchange. They invest in small/early phase businesses that need investment in order to develop. Investors receive 30% upfront tax relief, so it costs only £700 to invest £1000. Alongside this, VCTs allow for investment up to £200,000 in any one tax year.
In comparison, EIS is a UK government tax relief scheme that encourages private investment into early stage unquoted companies. Similar to VCTs, the EIS offers 30% upfront tax relief, however they have slightly dissimilar aspects. Unlike VCTs, the scheme enables you to defer paying tax on previous capital gains, and to set any losses you may incur against tax. Furthermore, EIS shares are exempt from inheritance tax once owned for 2 years.
For further information on planning for your retirement, please contact Paul Windmill on paul.windmill@myersclark.co.uk or call him on 01923 224411.