Monthly Tax Idea - February 2012
Take advantage of your pension allowance.
With most tax allowances, if you don’t use them you lose them. Despite all the changes the tax treatment of tax privileged pension provision is very favourable – tax relief for contributions at your top rate of tax, no tax on any growth in the funds, and the prospect of taking a tax free lump sum of, in broad terms, one quarter of the funds.
Planning for pensions should be done well before retirement, but if you are nearing retirement there is still time to take action and in fact the current rules make it very attractive to do so.
Recent changes to the pension relief rules mean they are now not a use it or lose it allowance. You have a three year carry forward and so if no pension premiums have been paid by you or on your behalf in recent years up to a maximum of £200,000 can be paid now with full tax relief.
The tax relief for payments mean that the cost to you of a pension payment is equivalent to the net of tax pay you would have received. In simple terms, £100 into a pension scheme will cost you £50 is you are into the top rate of tax, or £60 if you pay tax at 40%. When you retire you can take 25% of the funds in the pension scheme tax free. You then have a valuable fund that can be used to pay a pension by annuity or by drawdown. If we add into the mix that you may be paying tax at a lower rate in retirement there can be a sizeable benefit to your longer term financial position.
All of this can be boosted further if your company pays into your pension scheme using a salary sacrifice arrangement. This saves both you and the company national insurance contributions.
Of course, in planning for your retirement it’s vital to look not just at tax but also investment aspects. Also the pension rules have many detailed rules which could restrict the amount that you could pay. It is especially important to take expert advice in this area on your own personal circumstances.