As the song goes “I got bills, I gotta pay, so I’m gon’ work, work, work every day.” At some point however, people may want or need to give up going to work every day. Even younger people need to think about how they will pay their bills if they are unable to work for any reason.
If you are intending to give up work permanently, it is absolutely crucial to plan ahead. One option is to save into a pension. If you choose this route, it is important to understand your annual and lifetime allowances. It’s also important to be clear on what will happen if you exceed them.
The following explanation applies to defined contributions pensions. Defined benefits schemes may have different rules.
It also applies to the time before you start to make any sort of withdrawal(s) from your pension pot. Once you start withdrawing money, you may trigger different rules
The Annual Allowance
As its name suggests this is the amount you can save towards your pension each year. Generally speaking you can save an amount equal to your earnings, up to a maximum of £40,000.
If you put in more than you earn, then you will only get tax relief to the amount of your qualifying earnings. For example, if you earn £10K pa and put all of this towards your pension along with £5K from another source, you will only get tax relief on the initial £10K. Alternatively if you earn £45K pa and put all of it towards a pension, you will only get tax relief on the initial £40K.
There are different rules for those who are not in paid employment. At current time, those not in work can receive tax relief on pension contributions up to the value of £2,880. They can pay in more than this, but will not receive tax relief on these extra contributions.
The Money Purchase Annual Allowance (MPAA)
Starting this tax year, making withdrawals from pensions can result in your annual allowance being reduced to £10K pa. This is a complicated matter, and therefore it is a good idea to seek professional financial advice on the implications. It is, however, worth being aware of this. If you plan to make withdrawals from your pension fund, it is strongly advisable to check how this could affect your annual allowance.
The Lifetime Allowance
This is the amount of pension contributions on which you can receive tax relief over your lifetime. For most people it is currently £1.25 million and will reduce to £1 million in April next year.
If you are currently asking yourself “how can I save money on my pension pot”, then one possible solution might be to ring-fence your lifetime allowance. This is known as individual protection.
As with the MPAA, the rules around this are complicated, so again it would be wise to seek professional financial advice. They also depend on the type of pension arrangements you have, i.e. defined contributions or defined benefits. If you do have substantial pension savings, however, it could be worth looking into this.
Pensions and Tax
You may also be asking yourself “what tax will I owe on my pension pot?” The answer here is also likely to be, it depends.
If you take any funds over your lifetime allowance as a lump sum, you will be taxed at 55%. If you used funds over your lifetime allowance to generate a regular retirement income, you will be taxed at 25%.
This is in addition to any tax which is due on the income itself. Income from pensions is taxed in the same way as income from employment. Those who have reached state pension age are, however, exempt from paying national insurance contributions, even if they continue to work.
The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
Breaking up is never easy” but sometimes it’s the best you can do. The Abba hit “Knowing Me, Knowing You” was released in 1976. A lot has changed since then, but breaking up still remains a painful and potentially expensive matter.
The Basics of Divorce
There are three steps to getting a divorce.
Step one is to file a divorce petition. This currently carries a fee of £410.
If your spouse accepts the divorce petition, you can then apply for a decree nisi. This is essentially a statement which confirms that it is legally acceptable to end the marriage. If your spouse refuses to accept the petition and you wish to proceed with the divorce, you will need to attend a court hearing. You may require legal representation for this. The cost of this will vary depending on your needs.
If a decree nisi is granted, there is a 6-week cooling off period before you can apply for a decree absolute. The decree absolute formally and finally ends the marriage.
The Basics of Divorce Finance
It is perfectly possible and legal for two parties to divide their assets between themselves amicably upon divorce. Whether or not this is advisable depends on a number of factors.
Even if the divorce is amicable, it may still be worth both parties taking legal advice. Divorce can be a highly emotional situation. Having professional legal advice can help to keep both people focused on the practicalities.
There are basically four points to consider when looking at finances during a divorce.
- The needs of children.
- The immediate needs of the divorcing parties.
- Longer-term maintenance.
- The division of assets and debts
Where there are children in a marriage their needs will always be the highest priority. After this, both couples will need sufficient funds to meet their current needs. How much this will be will depend on individual circumstances.
It may also be considered appropriate for one party to pay another maintenance over a longer-term period. This is particularly likely if there are children. Even without children, however, the lower-income partner may be entitled to maintenance.
The division of assets and debts covers basically everything else – including pension savings.
How to Protect Your Finances in Divorce
Moving on financially after divorce is a bit like unscrambling eggs. Fortunately it can be done. You will need to disentangle yourself and your credit record from your spouse as quickly and effectively as possible.
One of your first priorities should therefore be to set up a current account in your own name. You should also aim to close all joint accounts as soon as you can. Separate lives mean separate bank accounts.
If you have joint debt, then this also needs to be dealt with. In an ideal world, the debt would be repaid as part of the divorce process. For example, joint assets could be sold and the proceeds used to pay the debt.
In the real world, this may not be possible. For example if children are to stay in the family home, then the mortgage payments on it will still need to be met.
Therefore the division of debts needs to be looked at just as carefully as the division of assets.
Divorce and Retirement Planning
Divorce can have a significant impact on your financial health in your later years.
First of all your existing retirement savings may well need to be split with your ex spouse.
Secondly you are each going to need to run your own home. This means that you may have the initial expenses of renting or buying a new property. It also means that bills which may have been split by two people now need to be paid individually.
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Retirement isn’t what it used to be. A century ago, when old age pensions were first introduced, life expectancy was far lower than it is today.
After a life of hard manual work, most people of retirement age, enjoyed on average, only 31 percent of their total lifespan outside the labour market (this included childhood) passing away on average, at the age of 47.
The future for retirees today could not be more different, the years that follow the end of a working life are no longer counted in single digits but normally, decades.
For many, their retirements are a time of new opportunities when a lifetime of prudence and investment in pension pots pays off.
With the advent of new pension freedoms enabling savers to draw down large lump sums from their pensions, with the first 25% tax free and the remainder taxed at their usual income level, it might be possible for a generation of ‘silver entrepreneurs’ to emerge.
According to the Daily Mail, a tenth of the UK’s wealthiest retirees are now considering taking the plunge and setting up small businesses with their nest eggs and on average, the size of the pot they can draw from is £550,000.
This suggests that the desire to ‘start a business using my pension’, is growing amongst retirees.
A lifetime of expertise
Ending a career at 55 or 65 has often meant abandoning a lifetime of knowledge and expertise acquired in a valuable and important field.
With new opportunities to ‘use my pension to invest in a business’ opening to entrepreneurial pensioners, these skills no longer have to go to waste.
It might be that in retirement you can establish the type of small business or consultancy that you had always dreamt of, one which is not necessarily based on your work.
Some retirees, used to a life of frenetic activity in business, have found doing nothing in retirement frustrating and there is growing evidence that simply ‘giving up’ at 65 is very bad for mental and physical health.
Even though many retirees might have had successful business careers, the prospect of cashing in up to a quarter of an entire pension pot in one go to set up a small business can be daunting.
Firstly, any investment is a risk, even if you think the business idea is sound and likely to work. Taking a risk when you are 35 is a different proposition to taking one when you are 65.
This means that, not only should you not gamble more than you can afford to lose (not that you can really ‘afford’ to lose any pension at all), but seeking professional business and investment advice is essential.
Many people who have worked in law, finance, engineering or other key professions or trades might have managed throughout their career to have successfully avoided ever creating a business plan or cash flow forecast.
Most local authorities run free business courses, which are always worthwhile investing your time in, but getting expert financial advice on your new business is also important.
Making the business as tax efficient as possible, ensuring that the right kinds of personal and professional insurance, or public liability insurance is purchased – these are the types of issues that a trained advisor can give you some guidance on.
(page 3 I.INTRODUCTION “On average, the 1900 cohort spent 69% of their total life in the labour market, …”
It’s hard to argue about the importance of saving for old age. Those still of working age need to look at how they are going to finance their later years. Those already retired need to think about getting the most out of their available finances. The exact rules around pensions and savings can be changed in line with government policy at any given time. Indeed the pension system has just been through an overhaul and with an election looming, politicians of all colours are setting out their plans for the future of pensions and the pensions of the future. In reality, however, these plans only have any meaning to people who are focused on saving for retirement. Let’s therefore look at some key questions on the topic.
What Is A Pension Pot?
Quite simply a pension pot is a common term used to describe savings which are specifically to finance retirement. People contributing to a pension pot may get assistance from the government (in the form of tax relief) or from an employer (in the form of contributions). Pension contributions are usually locked away until you reach retirement age.
How Do I Calculate My Pension?
There are plenty of online calculators to help with this. It’s strongly recommended to keep track of how your pension is doing so that you know where you stand. If you do decide you need to take action, sooner is usually better than later. https://www.moneyadviceservice.org.uk/en/tools/pension-calculator
I Don’t Like What I’m Seeing, How Can I Build A Healthier Pension Pot?
You have three options. You can save more money, you can manage your savings more effectively or you can do both. It can help to look at this question in the light of your overall financial situation. For example if you are carrying high-interest debt, such as credit-card debt, then it may well be in your best interests to focus any spare cash you have on paying this down.
Once you have cleared your debt, you can then divert the funds to building your pension. If you do have spare cash and are in employment, then it may be useful to look at making extra contributions to your workplace pension. This can be particularly helpful if your employer will top up any contributions you make. If you’re unsure about locking cash away until you retire, then it may be worth looking at ISAs as an alternative. Although contributions to ISAs are made out of post-tax income, generally speaking the income they generate is tax-free and the money in them remains accessible if you need it.
What Do I Need To Know About Getting More From My Pension Pot?
For many years getting more from your pension pot generally meant getting the best deal on an annuity. Now there are vastly more options for those with pension pots. With this in mind, it can be very helpful to get some professional advice before taking any significant decisions on how best to use your pension pot. http://www.telegraph.co.uk/finance/personalfinance/pensions/11468752/New-pension-rules-to-let-retired-savers-cash-in-annuities.html
It is also advisable to keep up to date with any changes which may affect pensions. For example at the current time, the Conservatives have a proposal to allow holders of annuities to sell them on. If enacted this could have massive implications for existing pensioners.
It’s also worth remembering that, generally speaking, pensioners have access to the same savings and investment products as those of working age. For example they get exactly the same ISA allowance as working adults. There are even some savings products tailored specifically to their needs (e.g. pensioner bonds). These can all help pensioners to make the most of their finances. http://www.moneysavingexpert.com/savings/pensioner-bonds