Pensions are one of the most effective ways to fund retirement. What you put into your pension can clawback money from the taxman, funnelling it instead into the pockets of your future self. Until then, your pension can grow more or less untaxed. When you come to actually need the money, you can normally withdraw up to 25% of your pension pot completely tax-free. And when you pass away, pensions are generally not subject to Inheritance Tax.
If your pension planning has not been top of the priority list for a while, we can help. Below are some of the main things to think about when it comes to your pension.
You can get tax relief on your personal contributions up until your 75th birthday, as long as those personal contributions are no more than the amount you earn or £3,600 gross, whichever is higher. Tax relief means that you end up with far more in your pension right away than it actually costs you.
That tax relief is especially powerful for higher and additional rate taxpayers, but perhaps most of all for those with taxable income just above £50,000 gross with children (who may lose their child benefit) or just above £100,000 gross (who may lose their personal allowance), whose eyes may pop when they realise just how costly missing out on pension contributions can be.
If you are employed, your employer can (and often must, unless you opt out) also contribute more on your behalf. If you’re self-employed through your own limited company, your company paying employer contributions into your pension can also be a great way to extract money from the company while saving on corporation tax as well.
The combined amount of your personal contributions and employer contributions is also limited by the ‘Annual Allowance’. The standard Annual Allowance is £40,000 gross, but a lower Annual Allowance – potentially as little as £4,000 gross – may apply if you have a high level of income, or if you have ‘flexibly’ accessed pensions in the past.
Finally, the ‘Lifetime Allowance’ puts a limit on how much your pensions can grow to without forgoing some (but by no means all) of the associated tax benefits. Check now to see if it still makes sense to carry on contributing. There are times when pension contributions are not the answer.
It usually pays to adhere to these limits, but there can be exceptions, and the rules can be complex. Our experts can help you to review your position regarding your earnings, the Annual Allowance and the Lifetime Allowance. We can then advise you on the right contribution strategy for you and, if appropriate, alternative ways to fund your retirement besides pensions.
For most, affordability is the limit. But if you have a high level of income, as mentioned above, the Annual Allowance may be cramping your style.
Bear in mind though that, under current rules, you can still normally carry forward any unused Annual Allowances from the last three tax years (2018/19 to 2020/21). This can give higher earners the opportunity to pay more into their pensions, but do not delay: any unused Annual Allowance for the 2018/19 tax year will be gone for good after 5 April 2022.
If you are still capped out by the above limits, consider making pension contributions for others, such as your significant other. It can often pay to work together as a couple towards your shared retirement, with two sets of pension allowances sometimes going much further than just one.
It may even be worth paying into pensions for your children or grandchildren, if you have them. Others can pay in up to £3,600 gross on their behalf, at a cost of just £2,880, with the taxman automatically picking up the rest, even though very few toddlers pay tax. With the money locked away until pensionable age, your gift may fund fine wine at age 60 rather than cheap beer at age 18.
Pensions usually do not get taken into account when it comes to Inheritance Tax. The rules say that so-called ‘money purchase’ pensions such as a SIPP (Self-Invested Personal Pension) can be inherited on a variety of favourable terms depending on the circumstances, which can be relatively favourable, especially with careful planning. It could make sense to spend such pensions only after you have spent down non-pension assets, and by doing so potentially saved your heirs a lot of Inheritance Tax.
Pension planning is not necessarily easy, so it’s often worth reviewing this with an expert. If you have questions about any of the above, on other aspects of pension, or your wider financial planning, please do not hesitate to get in touch with us.
For a full checklist to get on top of your finances in the new tax year click here.
This note is for general guidance only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investments. It represents our current understanding of law and HM Revenue and Customs practice as at & March 2022. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering any investment activity. Please note that levels and reliefs of taxation depends on the individual circumstances of each clients and are subject to change.
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