Of all the financial planning you do in your life, your pension is one of the most important considerations. The amount you manage to save during your working years will have to provide you with an income for the rest of your life.
That's why you should do everything in your power to build up a substantial retirement fund. Whenever you can, you should check on the progress of your pension provision and consider boosting your payments.
Changes to pensions made in April 2006 mean that you can now pay up to 100% of your UK relevant earnings into pension plans each year, receiving tax relief on all those payments at your highest rate. Relevant earnings are your taxable annual income and any bonuses, commission or benefits in kind that you receive from employment or self employment. Tax relief is available up to the annual allowance of £235,000 (tax year 2008/2009). The annual allowance is set by HM Revenue & Customs.
You can now pay into as many pension plans as you want, provided you don't exceed the limit mentioned above. This means that even if you are in a company plan, you can choose to start up another pension to boost your retirement benefits.
Pensions may invest in different types of investments, including investments based on stocks and shares, which carry different levels of risk. The value of your investment can fall as well as rise and you may get back less than you pay in.
The Lifetime Allowance will apply to your pension when you take your benefits. This allowance applies to all pension types. The rule for this is simple, if the total of all your pension benefits exceeds the Lifetime Allowance for the year you start taking the benefits, you will need to pay a tax charge.
This does sound a little scary, but the Lifetime Allowance is a large amount - for the 2008/09 tax year it has been set at £1.65 million (and will increase with time).
Your adviser will be able to give you information on the pensions rules and how they can help you boost your savings for retirement.
When it's time for you to retire, you have to decide how to use the money you've built up in your pension. Usually, people use their fund to buy what is known as a Lifetime Annuity. This provides you with a guaranteed income for the rest of your life.
As with most financial products, there are many different annuities to choose from. Because this purchase is vital to your future prosperity, you should consider talking to a financial adviser who can help you find the best one for you. There may be a cost associated with seeking advice from a financial adviser.
Tax and legislation are likely to change. The information given here is based on our understanding of law and HM Revenue & Customs practice at today's date. Tax relief may be altered and its value depends on your financial circumstances. Before buying a product you need to be aware of the risks and commitment involved. Details are available in the relevant Key Features Document.
