George Osborne must really have it in for the annuity providers.
I mean, haven’t they suffered enough already? Since he did away with rules that required an annuity for pension savings, the life assurance sector has taken a real beating.
At least the industry could hope that these policies could still be sold to the some people. After all, a known income for the rest of your life is a marketable proposition… and it may even win over those that don’t really appreciate how poor the rates offered are.
But recent news that the Chancellor is to remove the ‘death tax’ on pension policies has surely put annuities on borrowed time.
Now that the remainder of a client’s pension policy can be left to beneficiaries (anyone, not just a family member!) and taxed at the beneficiary’s marginal rate of tax, who is going to want an annuity where it goes to the provider instead?
Today I thought I’d remind you of the benefits of saving into a pension… because by now, they’re so vast.
Far too many people think pensions are so complicated that they just don’t bother with them. However, this blog will hopefully highlight some strong reasons why you should reconsider.
Everyone should be saving into a pension – here’s why
1. First, when you make a contribution,you get your tax back at the marginal rate. What does that mean? Well, if you’re a higher rate taxpayer, you get 40% rebated back into your pension plan. And if say, you’re a housewife and don’t pay income tax, the government will top up your contribution by 20% as if you had paid anyway (up to a certain limit). Now that’s not bad, is it?
2. Second, long gone are the days of expensive pensions. In today’s world of low-cost online platforms, you can create a private pension at minimal cost.
3. Third, all your returns roll up tax-free.
4. Fourth, when you come to retire (as early as 55), you can draw down a quarter of your fund absolutely tax-free. Okay, many people criticise pensions as merely tax deferment schemes. They tell you, you pay in the end, rather than at the beginning. But just think about the first quarter coming out tax-free. Let’s say you put in £5k – and it ends up compounding over the years to £20k. Well on the day you retire, you can take out £5k (a quarter of £20k) tax-free. That’s your whole contribution!
5. Fifth, as you draw down your savings, you pay tax at your marginal rate. Even if you were a higher rate taxpayer when you paid in, when you draw down, your rate could be as low as zero (currently earnings under £10k) or up to 20%.
6. Sixth,you don’t pay National Insurance contributions on pension income.
7. Seventh,your beneficiaries now get to draw down your pension pot at their marginal rate of tax too. Your pension doesn’t die even if you do!
8. Eighth, if you get your employer to make the contribution directly, then they don’t have to pay national insurance. That’s now almost 14% for most of us. So, if you’re working for a small company, then why not take a £5k pay-cut, and ask payroll to put it directly into your private pension? Also ask them to top up by the extra 14% they would have paid to the exchequer. I’m not saying every employer will happily do this, but it’s got to be worth asking.
9. Ninth, following the changes announced last budget, you can now keep your money in your fund, or draw it down as you see fit. It’s your money after all. Why not make the most of it?
This is all great news for the average investor.
The tax advantages afforded to pensions are welcome. No doubt! But for the average person, I would think the real benefit is simplicity.
These things are now understandable and that is a massive step in the right direction.