Some Britons may be able to enhance their income by up to 75% thanks to a pension “quirk.”
A PENSION “trick” could allow some retirees to increase their retirement income by up to 75%.
Pensions can be a valuable source of income for those who are planning for retirement. However, a person’s pension may differ based on their area of employment and how they choose to save. For retirement planners, there are two basic forms of private pensions to consider.
The first is a Defined Contribution (DC) pension, which is calculated depending on the amount of money contributed.
The next option is a Defined Benefit (DB) pension, which is often a workplace pension based on a salary and length of service.
Now, a “quirk” in the pension system has been found, which could result in defined benefit members earning 76 percent more than a defined contribution saver.
This is the maximum amount of income a person can earn before exceeding the Lifetime Allowance, which is the maximum amount of pension money a person can withdraw from their account before incurring a tax penalty.
Many people, though, may wonder why such disparities exist in the first place.
The explanation for this disparity has been revealed by AJ Bell, an online investment platform provider.
HMRC is now employing an out-of-date “multiplier” tool to convert a guaranteed DB income into a notional fund value to test against the Lifetime Allowance, according to the report.
Someone in a DB scheme might have a guaranteed, inflation-protected income worth £53,655 without exceeding the Lifetime Allowance, according to the organization.
In comparison, a 66-year-old DC saver with a £1,073,100 pot worth £30,418 could acquire an equivalent income from an insurance firm.
Tom Selby, a senior analyst at AJ Bell, elaborated on the situation.
“While it is well known that workplace defined contribution (DC) pensions are often the poor relation to generous defined benefit (DB) plans, there is a lesser known tax quirk that creates a huge disparity in the maximum retirement income someone can generate without exceeding the lifetime allowance,” he said.
“According to a reasonable calculation, defined benefit members can earn 76 percent more in retirement than their defined contribution counterparts without incurring a lifetime allowance charge.
“This is due to the ‘multiplier’ that was employed to convert a DB income to a notional.”Brinkwire Summary News”.