The new pension rules are great in many ways. Flexibility, Inheritance tax planning, and sheltering tax are all good. I’m a big fan of pensions and of regular long term saving, a strategy I call my ‘get rich slow scheme’. BUT there has been one change which is really beginning to bite. They have reduced the lifetime limit in pensions from £1.8 million to £1.0 million, progressively, over a number of years.
You might not think you have £1m in your pension….but you might also be surprised! The £1m limit means that if on retirement you take out more than £1m you get a tax currently at 55% (nice). Now before doing anything rash I’d wait until the July 8th Budget, Osborne may reduce the 55%.
For final salary pensions the way it works is that you pension has a deemed value, because of longevity (hurray) and very low interest rates your final salary rights are very valuable indeed. You can get a statement from your provider or employer but here is an example of how it might work.
Salary on which final salary applied £64,285
Years in scheme 28
Pension rights per year 1/60
So you’d have pension rights of £30,000 pa (64,285 x 28 / 60) on retirement.
A £30,000 a year pension might be worth (deemed value) say £600,000, so with any other pension pots you might be approaching £1,000,000, especially if they are invested wizely and grow up to retirement. Don’t forget that a £500,000 pension pot when you are 50 growing at 7% will be worth £1.7 million if you retire at 68!!!