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Taking stock of options before planning for retirement

Peter Legge Peter Legge

In advance of the Chancellor’s forthcoming Autumn Statement, it is worth taking stock of the measures the Government has already introduced to encourage people to be sufficiently prepared for their retirement.

A number of incentives, including changes to the taxation of savings income, new savings incentives, pension auto-enrolment and an online pension dashboard have been introduced in order to help people achieve that goal.

The details

From April 2016, savers can enjoy £1,000 of interest income tax free (or £500 for higher rate tax payers) and £5,000 of dividend income tax free.  Interest is being paid gross making it simpler for many savers, who will pay no tax on their investment income. Where savings income exceeds the allowances, a self-assessment tax return may be required to be submitted to HMRC along with payment of the additional tax due.

Incentives such as the ‘Lifetime ISA’ have been launched to promote saving for retirement. From April 2017, individuals between 18 and 40 can save up to £4,000 per annum and receive a government bonus of 25% (equating to a payment of up to £1,000 per year,) provided some fairly restrictive conditions are met.

Pension auto-enrolment is now well established and makes it compulsory for employers to automatically enrol qualifying employees into a registered pension scheme. Contributions can reach up to 8%, however, for annual earnings of between £22,000 and £52,000, an 8% contribution alone may be unlikely to provide a sufficient pension in retirement. Therefore, savers may wish to consider supplementing this in other ways. To date, almost six million people have already been enrolled in the scheme.

National insurance (NIC) savings are often overlooked in considering pensions. With employer pension schemes, no NIC is paid on pension contributions made by employees into employer schemes as the amount is taken from gross income. Personal pension contributions, on the other hand, are made from income which has already suffered NIC. Employer salary sacrifice schemes therefore offer a huge benefit and can be implemented to take advantage of the NIC savings.

In summary

Finally, the Government has committed to making an online Pensions Dashboard available by March 2017, providing savers with access to all their pension pots and help them to plan for their retirement more effectively. It is estimated that up to £400m of forgotten pension savings could be unlocked by connecting workers with their pots from previous employers. To provide further support, the Government are also consulting on a new ‘Pensions Advice Allowance’ which should come into effect in April 2017. This is to allow people approaching retirement to use up to £500 out of their pension pots tax-free towards the cost of financial advice.