Maximising your retirement income

The gap between the amount of money that people are saving, and the amount they need to ensure a comfortable retirement, is a perennial problem. It is important to act now to help maximise your income in retirement, including making the most of the available tax breaks.

Investing in a pension scheme, whether a company or a personal scheme, allows you to enjoy tax breaks on your pension savings. There are tax reliefs as you invest and a tax-free regime for your savings. Your employer may also be able to contribute and obtain tax relief.

Whilst significant restricitions have been placed on those with income in excess of £130,000, there is still scope for large employer contributions to both employer sponsored schemes and or private schemes for those with income of less than £130,000. In fact, in real extremes company pension contributions for individuals can still be close to £500,000 in one financial year. So for those with income of less than £130,000 in the current year and in the two previous tax years, company pension contributions, as a means of profit extraction from the business, are still very much relevant.

Scheme managers can provide pension forecasts to help you judge whether you are saving enough, and what additional savings you might have to make, in order to generate the income you will need in retirement.

Pension contributions based on 2009/10 earnings must be paid by 5 April 2010. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of UK relevant earnings, but subject also to the annual allowance, and a special annual allowance for those with annual income over £130,000 (see below).

The new anti-forestalling rules

With effect from the 9 December 2009 an individual will only be automatically exempt from the special annual allowance provisions where he/she has relevant income of less than £130,000. Relevant income is defined as total income, earned and unearned, less normal deductions, but not the personal allowance. It should however be noted that an individual's relevant income in a tax year can be reduced by up to £20,000 of contributions personally paid to a pension scheme during the year. Those caught in the £130,000 trap will be those who have had "income" of this amount or greater in any of the 2007/2008, 2008/2009, 2009/2010 tax years.

Anti-forestalling legislation has been introduced to prevent those potentially affected from seeking to circumvent this change by increasing their pension savings in excess of their normal regular pattern, prior to the restriction taking effect.

For those with relevant income of £130,000 or more in 2009/10 (or either of the previous two years) the new anti-forestalling rules mean that typically the amount which can be invested in pensions is capped at the pattern of investment already set at 22 April 2009. Tax payers with regular pension contributions may be able to invest at those levels and obtain tax relief at 40% this year, perhaps with scope to increase the level of investment to £20,000 per annum. Tax payers paying irregular premiums may invest up to the greater of their average pension contributions in 2006/07, 2007/08 and 2008/09 or £20,000, up to a maximum of £30,000. Note that the rules applying for 2009/10 and 2010/11 may also mean that a tax charge can arise for employees on employer pension contributions - talk to us about the new anti-forestalling provisions before acting.

Early Retirement

From April this year, the minimum age for drawing a private pension will rise from 50 to 55.  Most people cannot afford to retire at 50 but there are still a number of options you should consider if you will be aged between 50 and 55 on 5 April 2010.  These include:

• contributing to a personal pension plan coupled with immediate withdrawal of the maximum tax-free lump sum 
• accessing part of your pension fund in stages as a means to supplement your income as you reduce your employment income ultimately to full retirement
• phasing in your pension as you wind down your employment towards retirement.

 There may be pitfalls, so you should speak to an adviser before acting.

For advice on all aspects of financial planning, including your needs post retirement, please contact Rob MacKenzie at Littlejohn Wealth Management rmackenzie@littlejohnllp.com

Littlejohn Wealth Management Limited is authorised and regulated by the Financial Services Authority.