If you are on the run into retirement, this article covers three matters that may be relevant to you.
Retirement annuities
The rise in interest rates since Covid has led to something coming back in favour – retirement annuities.
With this retirement product, you enter an arrangement with a life company which pays a guaranteed fixed income for life, no matter how long you live. Generally, when you die, the income dies with you, or at least a significant portion of it does.
This is as opposed to taking out a Self Invested Personal Pension (SIPP). With a SIPP, you stay invested in retirement to try to benefit from the investment markets’ long-term growth.
You have more flexibility around when and how much income you take. Also, some people try to use SIPPs to leave money to their beneficiaries.
Although a SIPP is still the dominant solution for most retirees, the rise in interest rates has been good for annuity rates. They have risen by approximately 40% over the last two years.
This may well be a viable option worth exploring for cautious investors or singles without children.
It may also be worth considering a combined approach where you:
-use a SIPP for discretionary expenditure/fun money, and
-an annuity (perhaps in conjunction with the state pension) to cover essential spending, bills, etc.
State pensions
-For several years, IOM residents who have previously lived and worked in the UK have been able to increase their UK state pension entitlement by making UK voluntary national insurance (NI) contributions.
-In some circumstances, this can be done at the lower Class 2 NI. contributions “abroad” rate, as opposed to the higher Class 3 rate.
-The UK Government has recently abolished Class 2 NI for most purposes. However, they have recently confirmed that Class 2 contributions “abroad” can continue. If you have not already acted, the number of years you can “backfill” with voluntary contributions is scheduled to be significantly reduced from April 2025
The budget announced that IOM pensioners’ state pension would rise by 8.5%, which is good news. However, this is straining the fund that is used in part to pay state pensions, and it is scheduled to run out in 2047 unless changes are made.
We don’t know how this will play out; it may well be that the state pension will always be paid from other sources as a priority. The state pension age could potentially be put back further, or some form of means testing could be considered.
For those with the financial means to do so, this should focus on ensuring you have sufficient other pension provisions in place to lead a comfortable retirement.
UK pension changes
You may recall an issue widely reported in the UK press a couple of years ago about NHS consultants who were retiring because they’d “maxed out” their work-based pension.
They started to retire, and it became a problem. Therefore, the 2023 UK Budget announced that the pension Lifetime Allowance would be abolished. This was the allowance someone could reach before they were “maxed out,” with heavy charges applying to the excess.
This saved 80% of UK NHS doctors from getting a tax charge. On the face of it this seemed to make things very simple. It sorted the doctors out and consequently other people with large UK final salary pension schemes. However, it brought in a new regime for everyone else holding UK pensions, which has an impact on:
-The amount of tax-free cash they can take
-The amount they can hold in their pension on death and
-People moving to the IOM who are considering transferring their UK pension to an IOM pension.
This is a complex area; if you hold a UK pension or are approaching retirement and wish to discuss your retirement planning, please feel free to get in touch.
