Your pension is an incredibly tax-efficient way to save for your life beyond work, but to get the most from it, you’ll need to take full advantage of the tax efficiencies it offers.
This will be especially important over the next few years as the UK continues its economic recovery from the coronavirus pandemic. With thresholds and allowances frozen, tax rises imminent, and a cost-of-living crisis to contend with, keeping your long-term financial plans on track will require enormous diligence.
At Boolers, we want to ensure that your dream retirement remains attainable, whatever happens in the wider economy.
Here are five tips and tricks for ensuring just that.
1. Make full use of your Annual Allowance
The Annual Allowance currently stands at £40,000 for the 2021/22 tax year (or 100% of pensionable earnings, if lower). This is the amount you can contribute to the pensions you hold each year while still benefiting from tax relief.
You can carry unused allowance forward for up to three years. If you can afford to contribute above the £40,000 limit, check whether you have unused allowance available and you’ll receive additional tax relief too.
Tax relief is applied to contributions you make at the basic rate of 20%, so a £100 contribution to your pension pot will only cost you £80. As a higher- or additional-rate taxpayer, you can also claim additional relief of a further 20% or 25%, more on which later.
2. Be wary of the pensions taper
Different Annual Allowances come into effect in certain circumstances. To make tax-efficient use of your pension you’ll need to know which one applies to you.
If you are a high earner, with a threshold income of over £200,000 and an adjusted income of more than £240,000, you might trigger the Tapered Annual Allowance.
This reduces your £40,000 Annual Allowance by £2 for every £1 of adjusted income you receive over £240,000, down to a reduced allowance of just £4,000 for those with adjusted income exceeding £312,000 a year. This could severely limit the tax-efficient pension contributions you can make.
If your annual income fluctuates, it can be difficult to calculate the point at which the taper will be triggered. Speak to us if you are unsure.
3. Claim the tax relief you are due
As mentioned previously, tax relief is automatically received at the basic rate of tax, topping up the pension contributions you make by 20%.
As a higher-rate taxpayer, your contributions could be topped up by an additional 20% of tax relief, or by a further 25% for those who pay additional-rate tax.
Use your self-assessment tax return to claim the additional relief.
This is a valuable tax benefit and yet recent reports suggest that 8 out of 10 higher-rate taxpayers aren’t claiming the extra relief, missing out on a collective pot of £810 million.
4. Maximise your workplace pensions
Under current auto-enrolment rules for the 2021/22 tax year, the minimum contribution you can make to your workplace scheme is 8%. Of the amount paid into your pension each month, you pay 5% and your employer adds 3%. There is tax relief on these contributions too.
You can choose to increase your contribution above the 8% minimum. If you do, you might find that your employer will increase their contribution too.
5. Be aware of the LTA
The Lifetime Allowance (LTA) determines the amount you can withdraw from the pensions you hold without becoming liable for an LTA charge.
Although it has previously risen in line with inflation, the LTA is one of the thresholds that was frozen in the 2021 Spring Budget as part of the chancellor’s plan to recoup the government’s coronavirus overspend.
The allowance is currently £1,073,100 and will remain at this level until 2026. Any pension funds you take over this threshold will be liable to an LTA charge. The charge is 55% of any excess you opt to take as a lump sum and 25% if you draw excess pension funds as income.
Get in touch
If you would like to discuss the complexities of the pension taper, your potential tax liabilities, or any other aspect of your long-term retirement plans, please contact us today.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
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