Your pension fund should be a key part of your wealth planning, either for retirement income or generational wealth. Therefore, it is important to be aware of the reliefs available to you, and how you can make use of these both now, and in retirement.
Whether you are two or twenty years from retirement, it is important to have a plan. Below are some tips for those still working, those who are age 55+ and those already using their pension to fund their retirement.
Those working or looking to save
Pension tax relief
One of the biggest benefits of saving into a pension is the tax relief associated with making contributions. Tax relief is available at the basic rate (currently 20%) for all taxpayers with higher and additional rates taxpayers are able to benefit further through an extension to the income tax thresholds, effectively increasing the point at which the higher tax rates kick in.
For those earning between £100,000 and £125,140 (England, Wales and NI) the income tax saving could be as high as 60%. Even as a higher or basic rate taxpayer, the tax saving can still be significant.
(table of tax brackets)
As interest rates and inflation continue to rise, investment portfolios have been impacted. As such, a guaranteed return from tax relief is very attractive, enhancing your returns or softening losses.
You can choose the level of investment risk on this money when inside the pension. Even for non-earners, under 75, making pension contributions can still be worthwhile.
A £2,880 payment into a pension will attract £720 of tax relief. Even if the amount is modest, a 25% uplift is hard to turn down.
The annual allowance is the maximum amount you can save into your pension before you are taxed. The annual allowance was increased to £60,000 in 2022/23 making pensions even more attractive.
If you have not reached this £60,000 limit, you can carry forward any unused annual allowance into the next tax year. You can only carry forward three years of unused allowances so it is worth checking what allowance would be lost if not used and considering whether further contributions should be made.
It’s important to note that those with a total income of more than £240k, including company pension contributions, are likely to be caught by the tapered annual allowance which means the standard £60,000 allowance may not be available to them.
Exceeding the £60,000 Annual Allowance limit effectively means you won’t receive tax relief. There are also additional rules for those already drawing on their pension.
Equally, you need to consider the proposed changes to the Lifetime Allowance introduced in the 2023/24 Spring Budget. From 6 April 2024, the Lifetime Allowance will be abolished, however, there will still be a limit on what you can draw from your pension as a tax-free lump sum. We have prepared a more detailed synopsis of the Lifetime Allowance changes.
Pensioners or those past 55
Now that you have built up your pension, you need to consider the most tax-efficient way to spend it.
Whilst some pensioners have a stable income, others have varied, particularly in the early years of retirement, before the state pension is paid, possibly before final salary pensions are paid and if they are reducing their hours at work.
Current tax position
It is worth thinking about your current tax position, what it might be in the coming years, and your future goals.
For example, if you need £10,000 next year but know your income tax rate is lower now than in future years, it could be worth drawing the income sooner.
For those living off a spouse or civil partner's income, from cash or investment savings, it is worth considering whether a pension withdrawal to use up any unused allowances could increase the net proceeds that a pension can provide during their lifetime.
Pensions can also be used as a tax-efficient way to pass on wealth to a beneficiary on death however the proposed changes to death benefits, following the abolition of the Lifetime Allowance, could impact the amount passed on tax-free. You can read more about these proposed changes here.
How Mazars can help?
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