Pension and Retirement Planning
It is widely accepted that many of us will spend more than a quarter of our productive lives in retirement. As increases in living standards and breakthoughs in medical science translate into greater life expectancy, it follows that we will have to set aside more of our wealth during our working lives to provide for ourselves in our retirement. Many of us may also have to accept that we will have to work for longer than we anticipated or face the real prospect of a much lower standard of living once we have finished work.
It is therefore more important now than ever before, that the money you set aside towards your future retirement is invested as wisely as possible and it is monitored and managed on a regular basis to maximise the potential value of your fund for retirement.
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Contributions into pensions benefit from immediate income tax relief. This means that if you are a basic rate income tax payer, for every £1 you pay into your pension, you only need contribute 80p. The additional 20p basic rate income tax relief is equivalent to a 25% return on investment before a single penny is invested. If you pay income tax at the higher rate of 40%, then the income tax relief available is the equivalent of a 66% return on investment.
In addition to valuable income tax relief, investment gains made within your pension are not generally subject to taxation.
However, placing funds into a pension is only the first step. Making sure the funds are held in the lowest cost plan, with access to the most cost effective funds is equally important. The effect of this is illustrated by recent research undertaken for a client holding £500,000 in a personal pension and making a regular contributions of £5,000 per annum for an anticpated retirement in 10 years. Despite being in the 28th best arrangement out of a total of 200, a change to the best option produced an increase in the projected pension fund of £117,000. This analysis was the result of a staggering 729,000 calculations undertaken by our comparison software and illustrates the clear benefit of independent advice.
From age 55, your accumulated pension fund may be available to you. As a result of the legislative changes introduced to provide greater flexibility, the choices available for your pension are now greater than ever. The unique tax treatment of the fund combined with the reforms to the accessing of benefits means that pensions can provide a highly effecive inheritance vehicle as well as supporting financial needs in retirement. Understanding all of the options, having access to the most cost effective solutions and being aware of the range of other issues which are impacted by your decisions regarding the use of your pension are all crucial to maximising pension benefits in retirement and beyond.