ARE YOU CLAIMING ALL OF THE GENEROUS TAX RELIEF YOU’RE ENTITLED TO?
The unique combination of tax breaks and flexible access available to pensions make them a compelling choice when saving for retirement. One of the key benefits of saving into a pension rather than another type of savings or investment vehicle is the generous tax relief you’re entitled to receive.
Here are a few tips and details related to pensions so you can plan for a better retirement.
Saving for retirement is something that we should consider as early as possible. It’s important to ensure that you do everything to make your retirement fund work for you. This entails taking advantage of the tax breaks and allowances that give your pension savings a boost early on to help your pension pot grow through the power of investing.
The Pension Annual Allowance – What is it?
All UK taxpayers are entitled to claim tax relief on contributions they make to their pension. Tax relief is on pension contributions of up to 100% of relevant UK earnings (£3,600 p.a. if more). However, there is a limit on how much you can contribute while claiming tax relief, which is also known as your annual allowance.
As it currently stands, the pension annual allowance is £40,000 although in some instances, yours could be lower. If you have a taxable income of under £40,000 then your personal tax relievable contributions are limited to 100% of your earnings. Should your total taxable adjusted income be higher than £240,000 then the annual allowance might be tapered.
Tapered Annual Allowance
The rules surrounding this can prove complex but for every £2 of adjusted income you receive over £240,000, your allowance will be reduced by £1. Furthermore, the minimum annual allowance is £4,000 for those who earn over £312,000.
You Don’t Use All of Your Allowance – What Happens?
You could be missing out on tax relief that you can claim if you don’t use all of your pension annual allowance. It might be the case where you cannot afford to contribute the maximum each year, so it helps to understand that you can take forward any unused annual allowance.
Pension Carry Forward – What is it?
Pension carry forward makes it possible for you to take advantage of unused annual allowance for the previous three years. So, if you have a salary of £100,000 and have only used £20,000 of your annual allowance in each of the previous three years, that will mean that you have £20,000 from each year to use, making a total of £60,000.
When Can Carry Forward Be Useful?
This is often useful for those who are self-employed as their income can change from one year to the next. It is also useful for those who have been given a large sum of money and want to pay that into their pension. Business owners who have a limited company with additional profits on a certain year or those who have become a high earner with a tapered annual allowance could also take advantage of it.
How Do you Claim Carry Forward?
When planning to make large pension contributions, spreading them across tax years can mean higher rate relief is available on the full contribution. You can utilise pension carry forward by making additional contributions to your pension and you don’t need to notify HM Revenue & Customs to do this.
However, if you accidentally exceed the annual allowance (including any carry forward), you could be penalised. So, it’s important to check your past pension statements to see how much unused pension annual allowance you have and keep records to prove that you’re eligible to carry forward.
This is a complex calculation, so to be sure you’re following the rules exactly, it’s sensible to obtain professional financial advice.
Enhancing Your Retirement Income
Prior to your retirement, there are several things that you can do to give your retirement income a boost in the future. By filling in the gaps in your National Insurance contributions, you could increase your State Pension. There might also be several tax-efficient savings options available which could include the likes of Individual Savings Accounts (ISAs). When you take advantage of an ISA, there is no tax to pay on income or capital gains. With less tax paid, you could see higher returns. Furthermore, you could also look at tax efficient ways of accessing your pension from the age of 55.
Making the right decisions with your pension fund is important to your future. Taking money from your pension plan is all about understanding when to do it and how to do it, as this could have a significant impact on how long your savings will last.
To discuss your retirement plans or any concerns you may have, please contact us.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 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, TAX LEGISLATION AND REGULATION WHICH ARE
SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.