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Pensions Awareness Day 2021
UK Pensions Awareness Day takes place annually on 15th September. The Pension Awareness Campaign is an initiative launched in 2014. The aim of the campaign is to alert the nation that it is not saving enough for retirement and to unite the financial services industry, businesses, employers and the government to share innovative ideas and to work together in driving engagement with retirement saving.
It must be said that there has been much more awareness in the pension market since April 2015, when ‘Pension Freedoms’ were introduced to the mass market. This was a radical change to how individuals can access their pension pots in retirement. This effectively allows you to transfer existing pension schemes into a drawdown pot, which you can access flexibly. Generally, up to 25% of the fund can be taken as a tax free lump sum, with the balance being available to draw down as and when required, albeit subject to income tax at the plan holder’s marginal rate. In addition to its flexibility, this option can provide excellent death benefits, with funds being able to be passed to surviving family members which in some cases can be free of tax. It is not all plain sailing though, as drawdown needs to be managed carefully as it is subject to certain risks. Typically these are investment risk as the funds remain invested, and longevity risk as the UK population is living longer and it is possible funds could run out.
This new flexibility around retirement funds has obviously made more people aware of pensions, but there are other significant benefits to pension savings that shouldn’t be overlooked and these mainly revolve around tax. Firstly, pension contributions receive income tax relief which is generally provided at source at the basic rate of 20%. This means that if you wish to save £100 per month into a pension, you will only pay £80. In addition, if you are an intermediate, higher or top rate tax payer you can claim additional relief via self-assessment. This tax relief is available on contributions of up to 100% of your earnings and is capped at the annual allowance (£40,000 for 2021-22). It should be noted that high earners with income in excess of £150,000 are subject to a reduction in this allowance. Whilst your funds are invested, pension funds allow your money to grow tax free. In other words, they can increase in value at a higher rate than many other types of investment. One of the other main tax benefits of pension planning relates to inheritance tax. Generally speaking pension plans are held under trust arrangements meaning they are out with your estate for inheritance tax purposes, therefore tax savings of 40% can potentially be achieved by having your funds in a pension scheme.
Overall there are many tax advantages to pension planning but, as with any investment, the value of your investments can go down as well as up and is not guaranteed. For further information on how pension planning could benefit you please contact our Financial Services Department or contact Keith McIntosh at keith.mcintosh@raeburns.co.uk to discuss further. #PAD2021
