Pensions could be seen as a ‘later life investment account’. Maybe if pensions were known as a later life investment account, they might spark more interest?
A pension is the perfect place for savings you don’t need today, but you’ll need when you stop work. It’s home to a large proportion of your money mother dough and helps to build your ideal life.
Why you need to save to your pension
State pension income is currently £10,600 a year and is paid from age 67 if you have 35 qualifying years of national insurance contributions. The pension age is rising to 68 for anyone born after 6 April 1978. After the average household bills and food costs there won’t be much for enjoying your later years if you rely solely on your state pension.
A pension is an ideal place to save if you want to avoid living off baked beans in your old age. The later life investment account can provide you with an additional income to support your expenditure when you stop work.
Key features of a pension
- HMRC provide tax relief on pension contributions up to a maximum of 100% of net relevant earnings or £60,000 each year, whichever is lower. If you have income over £200,000, your maximum pension contribution that qualifies for tax relief could be lower than £60,000.
- Investment income and growth is tax free within a pension.
- You can withdraw 25% of your later life investment account tax free, up to £268,275.
- There’s no limit to withdrawals from age 55 (rising to 57 in 2028, and 58 in 2034).
- The remainder is taxable at your marginal rate of income tax. Large withdrawals could be taxed at higher (40%) and additional (45%) rates.
- You can hold cash, bonds, equities and commercial property in a pension.
How much do you need in your pension?
It’s different for different people and there are LOTS of variables. A general rule of thumb you could use is the 4% rule. There’s been academic evidence[i] to suggest an individual can sustainably withdraw 4% of a 50% defensive, 50% growth portfolio for 30 years. This assumes increases to spending in line with inflation.
Want to spend £40,000 a year on top of your state pension income when you stop work? You could need £1m. It’s not a perfect method and financial advice becomes even more important later in life, but can give you an idea to understand the magnitude of savings you will need to accumulate.
How much are you saving into your later life investment account, I mean pension, to meet your future expenditure?
Remember that when investing your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Levels, bases and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
This article was written by Gregory Deer at Muvado Money Limited, an appointed representative of Sense Network Limited, based on his understanding of current legislation. Dated 3rd May 2023.
[i] William Bengen ‘Determining withdrawal rates using historical data’, 1994