A private pension can be an invaluable investment vehicle that is ultimately designed to offer savers a secure income during their retirement. Having adequate provisions for the time when we no longer work is essential for many reasons, including providing peace of mind and financial protection. In the next passages, we’ll take a closer look at private pensions and explore their many advantages.
Having an income during retirement
While working, savers pay into their private pensions. A private pension is a term used to describe a plan into which people contribute to from the money they earn, which in turn then pays them a private pension when they reach retirement. A private pension is an alternative to the Government’s state pension. Typically, it involves individuals investing funds into mutual funds or saving schemes.
The main benefit, as touched upon earlier, is to ensure that when employment ends and a regular salary no longer arrives in your account each month, you still have a source of income. You will need this to cover all your daily expenses and annual outgoings. How much you require will depend on the lifestyle you wish to appreciate in retirement, any specific plans have, and how many dependants rely on you.
Tax benefits of a private pension
Those who save into a private pension will discover that they will receive tax relief. How much tax relief that a person receives is always guided by how much income tax they pay. For example, if you are a 20 per cent taxpayer, you will then receive another 20 per cent into your private pension as you are no longer paying that tax when you retire. This can result in significant savings which can build up over time providing that it is invested appropriately.
Protection from Inheritance Tax (IHT)
A third and final benefit of private pensions is protection from inheritance tax. Inheritance tax is a mandatory levy that must be paid on a person’s estate when they die. An estate includes property, money and possessions like jewellery, vehicles, and even collectible art. Inheritance tax is payable by the person who inherits the estate of the individual who has died.
Private pensions are exempt from inheritance tax. As a result, you can pass down as much of your private pension to your children or other family members as you want. Due to this inheritance tax relief, you can effectively mitigate the size of your final inheritance tax bill. This way, when you die less tax will need to be paid on your estate and you can ensure that less of your hard earned wealth goes to HMRC but remains with your beneficiaries instead.
While today, you are legally allowed to draw down your entire pension in one lump sum, it is important to understand the impact that such a decision will have on your estate.
Are you interested in learning more about private pensions?
Whether you are looking for help with retirement planning in Chester or Shropshire, or would just like to explore the advantages of a private pension in greater detail, we can help. With more than 25 years’ professional experience helping people plan for the future, our expert team at Hartey Wealth Management offer a comprehensive service.
We offer our clients advice on estate and retirement planning but also portfolio management and guidance on mitigating inheritance tax. Through sound investments and effective tax strategies, we can help ensure you enjoy the income you desire in retirement and make your wealth work that little bit harder for you and your loved ones.
Don’t hesitate to contact us to discuss your questions and concerns regarding private pensions.
