With the significant changes to the UK pension system just around the corner, it is essential for those in or facing retirement to review their pension savings to ensure that they're making the most of their retirement pot. With this in mind, we share some reasons why you should boost your pension savings before the tax year end in April and how to go about it.
- Maximise pension contributions
The new pension freedoms mean that those over the age of 55 will have instant access to their pension savings come April 2015. The combination of tax relief and tax-free cash means that for the majority of savers, their pension will outperform ISAs on a like-for-like basis. This means that those aged 55 or over should consider maximising their pension contributions first before paying into an ISA or savings account.
- Boost Self Invested Personal Pension (SIPP) funds now before accessing the new flexibility
If you're looking to take advantage of the new income flexibility, you may want to consider boosting your SIPP fund before April. Anyone accessing the new flexibility from the 6th April will find their annual allowance slashed to £10,000. It is important to remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility. Anyone in capped drawdown before April, or who only takes their tax free cash after April, will retain a £40,000 annual allowance.
- Take advantage of the changes to the 55% pensions "death tax"
As well as the pension reforms, the Chancellor also announced sweeping changes to the tax treatment of private pensions after you die, including the removal of the 55% pensions "death tax" in some circumstances. The new rules will make pensions a more tax efficient way of passing wealth to family members when you die. In order to shelter savings from Inheritance Tax (IHT), you may want to consider asking advice to see whether it would be appropriate for you to move savings that would otherwise be subject to IHT into your pension. Provided that you're not in serious ill-health at the time, any savings will be immediately outside the estate, with no need to wait 7 years to be free of IHT.
- Secure personal tax relief at top rates
If you're a higher or additional rate taxpayer this year, but your income fluctuates due to profit related bonuses or you're self employed and performance can vary, a pension contribution now will secure tax relief at your higher marginal rate. Flexing the carry forward and PIP rules gives scope for some to pay up to £230,000 tax efficiently in 2014/15. For example, an additional rate taxpayer this year, who feared their income may fall to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.
- Don't miss out on £50,000 allowances from 2011/12 & 2012/13
Carry forward for 2011/12 & 2012/13 will still be based on a £50,000 allowance. However, as each year passes, the £40,000 allowance dilutes what can be paid. At present, up to £190,000 can be paid into pensions for this tax year without an annual allowance tax charge. If the allowance stays at £40,000 by 2017/2018, it will reduce to £160,000.
- Use next year's allowance
If you have a particularly high income, you may want to pay more than your 2013/14 allowance, even after using up all your unused allowance from the past three carry forward years. To get around this, you can pay against your 2014/15 allowance before the 6th April by closing your 2013/14 PIP early. This opens up your 2014/15 PIP, which allows an extra £40,000 to be paid in this tax year.
- Recover personal allowances
Pension contributions reduce an individual's taxable income, which means that they're a great way to reinstate the personal allowance. For example, for a higher rate taxpayer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.
- Sacrifice your bonus for employer pension contribution
March and April is typically the time when companies pay employees annual bonuses. Instead of receiving your bonus, you could sacrifice it for an employer pension contribution instead. The employer and employee NI savings made could be used to supercharge pension funding, giving more in the pension pot for every £1 lost from take-home pay. Your taxable income will be reduced, potentially recovering personal allowance.
If you would like to make the most of your pension before April or if you have any questions regarding the forthcoming changes to pensions, contact Retirement and Investment Solutions on 01489 878300.