Questions about pensions you should be asking

Changes to pensions legislation mean savers have more flexibility when it comes to taking their pension.

Farmers Weekly has asked chartered accountants Saffery Champness to answer key pension questions:

How much can you pay in under tax relief?

Individuals can invest up to £3,600 (£2,880 plus a 20% tax credit) into their pension scheme if they have registered no net profits to a maximum of £40,000 for profits up to £150,000.

For every £2 over net profits of £150,000, pay-in allowances fall by £1 from the £40,000 allowance until £10,000. For example, if a farmer earns £180,000 of net profit, their annual allowance will drop to £25,000.

Which sorts of incomes qualify for annual tax relief?

Earnings or benefits from employment, trading incomes from sole traders or partnerships and furnished holiday letting income (excluding other rental income).

See also: Farm employers need to act on new pension rules

What if you didn’t use up last year’s allowance on pension contributions?

Unused allowances dating back to 2013-14 may be added to top-up these allowances until 5 April 2017.

It’s crucial for businesses who earn net profits of over £150,000 to use up these allowances before the deadline or they will be forfeited as these previous years don’t yet fall under the current regulations.

Contributions that exceed these allowances are subject to a tax levy.

For every £2 over net profits of £150,000, pay-in allowances fall by £1 from the £40,000 allowance until £10,000

What is the lifetime limit?

The lifetime limit was reduced in April 2016 to £1m on pension pots. This means any pension savings that exceed that figure are subject to a lifetime allowance charge.

How much is the lifetime allowance charge?

It is dependent on how surplus funds are withdrawn. If withdrawn as a lump sum they are subject to 55% charge or 25% if taken out in another way.

At what age can you withdraw your pension savings?

Unless you’re in ill health, you must be aged 55 (rising to 57 from 2028) to withdraw amounts, which will be subject to income tax.

How can pensions savings be withdrawn?

The four main methods for withdrawing pensions are:

• Taking a tax-free lump sum up to 25% of your total pot value
• Purchasing an annuity guaranteeing a fixed income for the rest of your life
• Transferring your money into a flexi-access drawdown scheme
• Withdrawing cash in a single or number of lump sums

What is an annuity?

An annuity is an agreement taken out with an insurance company where you exchange your entire pension pot for a fixed rate of regular payments for the remainder of your life.

Is taking out an annuity a good idea?

An annuity ensures that your pension pot will never run out and leave you without regular payments.

However, annuities have become less popular in recent years due to poor rates. Also, if you die early you may have handed over a large pot of money to an insurance company and seen very little in return.

It’s important to structure an annuity agreement that continues in the event of premature death, either to a spouse or for a fixed period of time.

What is a flexi-access drawdown?

It’s a way to customise what you withdraw from your pension. Under such a scheme, individuals can withdraw lots of little amounts, when and if they need them.

This can be beneficial to manage income to remain within the basic rate of tax or below the 45% rate of tax by flexing how much is withdrawn each year.

How much can you withdraw from a flexi-access drawdown scheme?

Investors can tailor how the amounts to withdraw to suit them if and when they need it. A quarter of the pension pot can be withdrawn as a tax-free lump sum, and the rest can be withdrawn as taxable income at any time.

What are the drawbacks of flexi-access drawdown?

There is a risk of running out of money as a result of taking too much out in the early years of a pension or living for longer than expected.

It’s crucial to regularly assess and review the flexi-access drawdown and to consult a financial adviser to compare providers and ensure your investments remain competitive.

An adviser will manage rate and size of withdrawals to ensure pension pots are likely to last.

Is inheritance tax payable on pension pots?

No, IHT is no longer payable on pension pots, and where someone dies under 75, no tax is due on a lump sum from a drawdown fund.

If the deceased is over 75 or already drawing a pension, tax will be payable at their marginal rate.

Can anyone be nominated to inherit a defined contribution pension scheme pot?

Yes. This makes it all the more important to manage inheritance tax and income tax liabilities.

It’s crucial to have your nomination in place to prevent IHT in the event of death.

How easy is it to change my pension plan?

Changing pensions should be relatively quick and easy and is critical to guarantee a personalised scheme that works for you.

Older pension schemes may not allow for flexible drawdown so it’s important to always be on the lookout for better deals.

Always ask: What rate is my pension generating? Are they performing well? What are the charges?