A significant number of people working in the energy sector are approaching retirement and a substantial number are also being offered redundancy packages.
Receiving redundancy and retirement quotations at the same time can be daunting. It is an area full of complexity where taking professional advice can prove hugely beneficial.
The first £30,000 of a redundancy payment is tax free and the balance subject to income tax. This can push people into the 40% or 45% income tax brackets. It can also mean that their personal allowance worth £11,000 in 2016/2017 is lost partially or completely.
For every £2 earned over £100,000, £1 of their personal allowance is lost meaning those earning over £122,000 lose it completely. This is an effective tax rate of 60% on that band of earnings.
If the excess funds are not required immediately paying some or all of the funds into a pension can generate significant tax savings initially and potentially moving forward. There are limits as to how much can be paid into a registered pension each tax year but carry forward of previous years’ allowances can be made under certain circumstances.
The pension flexibility rules introduced in April 2015 mean that pensions can now offer huge tax planning opportunities.
Whilst purchasing an annuity is still the right thing for many to do for others it is the last thing they want to consider give current annuity rate levels.
It is possible to withdraw tax free cash over a period of years and use this to support their lifestyle in retirement.
This can be used in tandem with taking income from a flexi access drawdown plan thus generating sufficient funds to meet lifestyle costs but also minimising the impact of taxation.
Flexibility and control are important benefits but care has to be taken over the sustainability of any income drawn and the amount of investment risk taken is also an important consideration.
The rules regarding death benefits have also changed and if death occurs before age 75 years old it is now possible for a beneficiary to receive an inherited pension pot which can be drawn on tax-free.
This means that the pension fund remains sheltered from income, capital gains and inheritance tax. This could have huge tax benefits but will only be an option of your pension scheme offers that flexibility.
The vast majority of existing schemes do not offer all the flexible options as these tend only apply to newer pension arrangements.
The new rules only apply to money purchase arrangements. Those in final salary schemes would need to actively transfer out their benefits to take advantage of the new rules.
Transferring from a final salary scheme means giving up valuable pension benefits and advice in this area is required to be received from a pension transfer specialist before effecting a transfer.
Appointing a pension specialist at retirement could be hugely rewarding considering retirement can quite easily last 30 years.
Paul Gibson is Managing Director and Chartered Financial Planner at Granite Financial Planning Ltd.
