To help navigate the complexities of planning for retirement, Michael Angus, wealth planning director and Chartered Financial Planner, has compiled his top tips to make the most of pensions.
Mr Angus’ list is below:
1. Tax relief for investors
Pension contributions benefit from tax relief at an investor’s marginal rate – potentially worth up to 45% in England, Wales and Northern Ireland and up to 46% in Scotland. Your investment grows free of tax, and you can take 25% of the eventual fund as tax-free cash. Pensions can also provide a very attractive solution for those trying to reduce the inheritance tax bill on their estate. An investor can nominate a particular person to receive their pension pot after they die and, depending on their age at death, the money can be tax-free.
2. Boosting your pension
You can use a process called ‘carry forward’ to increase your pension contributions. Carry forward allows unused annual allowance from the three previous tax years to be used in the current year. This means that if you have not contributed to a pension at all in the three previous tax years, and you have sufficient earnings, you may be able to boost your pension fund by up to £160,000. Much of that money would be contributed by the government, so a higher-rate tax payer on a marginal rate of 40% could add £96,000 to their pot and receive £64,000 from the Treasury. These figures would be even more attractive with Scottish tax rates.
3. Avoid additional costs
The lifetime allowance – the amount that you can withdraw from your pension schemes through lump sums and retirement income without triggering an extra tax charge – has also been reduced, from £1.8 million in the 2011/12 tax year to just £1.055 million. If you exceed this limit you could incur tax charges of 55% or 25%, depending on how you take the money. There are ways to avoid having to pay additional tax and this includes ‘protection’ schemes offered from 2006 onwards. Two forms of protection are available – fixed protection 2016 and individual protection 2016. You can find out more on the https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance#check-your-existing-protection but it is complex and you should speak to a financial adviser before making any decisions.
4. Consider alternative options
In addition to applying for protection, you could consider investing in alternative tax efficient investments, or, if you belong to an occupational scheme, stopping your own pension contributions or talking to HR about taking benefits in a different form. Those who opt out of further pension investment and who are employed should beware being auto-enrolled into their employer’s pension scheme – it could cost them dearly.
5. Don’t worry about uncertainty but do plan for it!
It is impossible to predict what the government will do next when it comes to pensions. But don’t let this deter you from using a flexible and tax-efficient way of saving. The best way to deal with uncertainty about the future is to make the most of the allowances and tax reliefs that are available right now. Talk to your financial adviser about how to maximise – and protect – your pension contributions and look forward to reaping the benefits when you retire.