Retirement Planning and Pensions
Retirement planning requires understanding state pensions, workplace pensions, and personal pensions. The State Pension is based on National Insurance qualifying years (currently 35 for the full new State Pension, 10 minimum). Auto-enrolment requires employers to enrol eligible workers, with minimum contributions split between employer and employee.
Defined benefit (DB) schemes promise a set income; defined contribution (DC) schemes build a pot. On retirement, DC pots can be accessed via UFPLS, flexi-access drawdown, or annuity purchase. The Money Purchase Annual Allowance (MPAA) restricts future contributions once flexible benefits are accessed. The Lifetime Allowance was abolished from 2024/25, replaced by Lump Sum Allowance and Lump Sum and Death Benefit Allowance limits.
Traps: confusing the annual allowance with the MPAA; forgetting that pension contributions attract tax relief at the marginal rate; and assuming the state pension is means-tested (it is not). Also watch for carry-forward rules and the tapered annual allowance for high earners.
Worked example: A 60-year-old DC member wants to take 25% tax-free cash. If her pot is £400,000, the tax-free lump sum is £100,000, subject to her Lump Sum Allowance. The remaining £300,000 can be flexi-accessed, but doing so triggers the MPAA, reducing her future annual allowance. Planning the sequencing of withdrawals matters.
Rule of thumb: know the allowances before you touch the pot.