UK Personal Pensions:
A UK Personal Pension is a tax effective way to save for retirement for UK tax resident individuals. It is ultimately a mechanism for deferring income that could be received now, and taxed at the individual’s highest marginal rate, to a later point in life.
Currently a UK tax resident can obtain 100% income tax relief on pension contributions that are made. The maximum that can be contributed to a UK pension is between GBP 10,000 – 40,000 per annum (known as the annual allowance). Clients may have the opportunity to utilise unused allowances in previous tax years and carry them forward to make higher contributions in the current tax year.
The Lifetime Allowance (LTA) is the maximum that can be saved tax efficiently into a pension during an individual’s lifetime. The LTA is currently £1,030,000 and increases by RPI every year. The LTA is tested at the point that the individual draws the pension, reaches the age of 75 or when the individual dies. Any excess fund value above the LTA at the time is taxed at 55% if taken at a lump sum or 25% if the individual draws the fund as an income. There are strategies available to help mitigate this tax charge if planned correctly.
A private pension can currently be drawn from age 55. The first 25% of the fund value can be drawn free of income tax and is typically drawn as a lump sum. Since April 2015, clients now have complete flexibility as to how and when to draw the remaining 75%. However, these withdrawals are subject to UK income tax so need to be carefully managed.
If a member of pension dies before age 75, typically the fund can be passed to the beneficiaries free of UK Inheritance Tax. If a member dies post 75 the beneficiary will be taxed at their marginal rate of income tax on the proceeds they receive from the fund.
The ‘Nomination of Beneficiaries’ document provides clear guidance to the pension trustees as to where to distribute a pension fund upon death and therefore it should be regularly reviewed keeping in mind the wider estate planning considerations and Inheritance Tax.
As well as the initial tax relief received on contributions, a pension pot can grow free of Capital Gains and Income tax providing a useful tool for building part of an overall retirement strategy.