AJ Bell pension expert Tom Selby explains the key rules
Thursday 09 May 2019 Author: Tom Selby

I’m 41 and have managed to save around £310,000 overall in three defined contribution pension pots.

I wanted to know what pension growth rate I should use as a conservative estimate to highlight what I might expect
at 58 (earliest age to retire), 60 and 65.

Should I continue paying into my pension pots, albeit at a reduced rate as I worry I might breach the lifetime allowance if the growth rate over time does this?

Steve


Tom Selby, AJ Bell Senior Analyst says:

Just a reminder that I can’t give advice, but I can provide a bit
of information about how the rules work.

Let’s start with the lifetime allowance. This is the cap on total tax-incentivised pension savings a person can build up throughout their lives. It currently stands at £1,055,000 and is due to increase every year in line with Consumer Prices Index (CPI) inflation.

It’s worth noting that because this is due to rise in line with inflation, by the time you retire it should be much higher. If we assume inflation of 2.5% a year, in 20 years it’ll be just north of £1.7m. This depends on the Government not tinkering with the rules, which unfortunately cannot be guaranteed.

One thing to consider is that if you breach the lifetime allowance, any tax charge will only be applied on the excess once you draw a retirement income (or turn 75). The lifetime allowance charge is designed to negate the tax relief incentives you’ve enjoyed on the money you’ve paid in, so you won’t lose everything.

The investment growth you might enjoy will depend on a wide variety of things including the performance of your underlying funds, the charges you pay and how much risk you take.

If you take more risk you have the chance of achieving higher returns, but this will come with more uncertainty. Equally a lower risk portfolio should deliver a more certain outcome, but your potential for market-beating returns will be reduced.

Crystal ball-gazing can be a fool’s errand – you’d be much better reviewing your portfolio regularly (at least once a year) to make sure you’re happy with how much you’re paying in, your charges and the level of risk you’re taking.

Sadly I cannot tell you whether or not to stop paying in as that would constitute advice. However, I can say that the tax treatment of pensions is extremely generous – you get a minimum of 20% tax relief on contributions and 25% of withdrawals are tax-free from age 55.

Provided you are within the annual and lifetime limits, saving in a pension remains a sensible idea for most people.


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