Research carried out by Aviva during the recent European Football Championship revealed that many people know the rules of football better than they do how pensions work.
For example, 59% of those asked were able to explain the football offside rule compared to only 40% who knew when they can claim their State Pension.
As a professional rugby player, it is possibly true for you too that you know the laws of the game better than you do the key rules of pensions.
Yet, understanding how pensions work is just as important.
Because of this, in the same way that you keep up with changes to the laws of rugby, it is also crucial to appreciate the effect of changes to pension rules. It is highly useful to understand how changes could affect you and how you can potentially take advantage of them.
Discover why understanding how pensions work is so important and find out about some of the key pension “laws” you need to be aware of.
The principles remain consistent, but laws change
Watch any historic game of rugby and it is clearly identifiable as the same sport you are playing today.
Admittedly, the scrums are far less convoluted and modern line-outs look less like a fight outside a pub at closing time than they did before the legalisation of lifting. But, it is still clearly the same game being played and enjoyed.
The law changes you see almost annually are designed to speed the game up and make it a more attractive spectacle, as well as safer for those taking part.
In much the same way, the idea of saving for your retirement works on the same principle as it did decades ago. You save money into a pot that you can then access when you retire to provide you with an income once you are no longer earning a salary.
As with rugby, the laws governing pensions have changed, quite dramatically in some respects, for the benefit of savers and to make pension saving more accessible and less complicated.
In the same way that you need to understand rugby laws from an attacking and defensive perspective, it is possible to split pension laws into two: the rules governing the process of saving into your fund, and the separate rules for drawing from it.
Contributing to a pension is a highly tax-efficient way to save for your retirement
There are two important rules you need to be aware of when it comes to building your pension fund.
First, you are eligible for tax relief at your marginal rate of Income Tax. Basic-rate relief is paid at source, which means that for every £80 you contribute, the government adds a further £20.
That is effectively an immediate 25% increase on your money. You can then claim higher rates of relief through your self-assessment tax return each year if you are a higher- or additional-rate taxpayer.
Secondly, the Annual Allowance limits the amount you can contribute tax-efficiently each year. In 2024/25, your Annual Allowance is the lower of £60,000 or 100% of your earnings. You may have a lower Annual Allowance if your earnings exceed certain thresholds, or you have already flexibly accessed your pension.
Equally, you are allowed to “carry forward” unused Annual Allowance from the three most recent tax years to boost the value of your fund.
Since a change to the rules announced in the 2023 Budget, there is now no limit on how much you can tax-efficiently accrue in your fund in total.
Recent law changes have simplified how you can draw from your pension fund
Meanwhile, for pension withdrawals, the rules have changed significantly since the introduction of the Pension Freedoms legislation in 2015. This has created a remarkable level of flexibility in how you can draw from your accumulated retirement fund.
As with the process of building your fund, there are two important rules to bear in mind:
- You need to reach a certain age before you can access your fund. In 2024/25, this is 55, rising to age 57 in 2028.
- You can effectively take whatever you want from your fund, be it regular income or lump sums. But crucially, with the exception of the first 25% of your fund that you can take tax-free, you will pay Income Tax at your marginal rate.
Clearly, within the parameters of those two rules, it is important to have an income strategy in place once you have stopped working and will be using your fund to provide you with regular income.
You will need enough income to be able to live comfortably, while ensuring that you do not outlive your fund.
There are various options available to support your income management, such as buying an annuity with some, or all of your retirement fund. This will provide you with a guaranteed income for life, with options to have this increase every year, and a proportion payable to your spouse or civil partner if you die before them.
It also helps to have a good understanding of the State Pension. The level of income you receive, and when you can access your pension are subject to legislation. Because of this, it is worth checking on the government website to see how much you will be entitled to receive when you reach your State Pension Age.
It is important to keep abreast of changes to the laws governing pensions
You will obviously be aware that the laws of rugby are constantly changing. The recent changes affecting the offside law after a player has kicked from hand, and the removal of the scrum option at a free-kick, are just the latest in a series of law updates announced by the International Rugby Board (IRB) on an annual basis.
The same applies to legislation relating to pensions, as Budget statements and other financial announcements can affect your retirement planning.
This is likely to be even more the case in the coming months as, with a new government recently being elected, there is a bigger chance that they will be looking to make changes.
For example, the new chancellor, Rachel Reeves, will give her first Budget statement on 30 October, and it is very likely that this could contain measures that will affect your finances.
As you would keep abreast of law changes in rugby, we would suggest that it is equally sensible to keep an eye on financial announcements of this kind.
Get in touch
If you would like to talk about your own arrangements and how changes to pension legislation could affect you, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
