The quick read:
The longer your money is invested, the more potential it has to grow – thanks to the power of compounding. So, maximise your pension contributions today
With all personal pensions, you get an automatic top-up for basic rate tax relief. And if you’re a higher or additional rate taxpayer you can claim extra relief via your annual tax return
In the current tax year, you get tax relief on up to £40,000. But you can carry forward any unused allowance from the last three tax years
Seldom in recent history has the end of the tax year marked the end of such a turbulent 12-month period. On 5 April 2020, the UK’s first national lockdown was not even two weeks old; since then, our lives and the economy have been turned upside down.
We can only guess what the long-term consequences will be in terms of taxation, though at some point in the future the bill for the COVID-19 pandemic will need to be repaid. The forthcoming Budget might bring greater clarity, but the expectation is that significant changes in the UK’s tax regime will be deferred until economic recovery is on a firm footing.
Financial consequences for individuals who have been lucky enough to maintain income security during the pandemic, however, point in a more positive direction. Missed holidays, theatre and cinema trips and weekend breaks mean more money in the bank – money which can be put to work topping up pension pots.
So, it’s all the more important now to take advantage of current tax breaks – doing so could make all the difference to the amount of income you have in the future. The Pensions and Lifetime Savings Association recommends that for a comfortable retirement – including three weeks’ holiday on the continent a year and a few theatre visits, for instance – you will need an income from your pension of at least £33,000 a year for an individual, or £47,100 for a couple.1
But how can you make the most of the tax allowances available to you – and ensure your pension is getting you closer to achieving your retirement goals?
The early bird catches the worm
You may be young enough to think that retirement is a long way away and that it’s too soon to think about pension planning. However, the earlier you start saving into your pension and the longer your money is invested, the more potential it has to grow – thanks to the power of compounding.
Compounding is when you earn interest on an investment, and then additional interest on the new, larger balance over time – leading to exponential growth.
Make the most of the current tax breaks
With all personal pension contributions, you get an automatic top-up for basic rate tax relief. That money is paid directly into your plan by your pension provider. So, if you’re a basic rate taxpayer and have £4,000 to invest in your pension as a lump sum, you’ll get £1,000 in tax relief on day one. That’s a very quick boost on your initial contribution.
If you’re a higher or additional rate taxpayer, you can currently claim extra tax relief via your annual tax return.
Carry forward any unused pension allowances
You can invest as much as you like into your pension, but you currently only get tax relief on up to £40,000 of pension contributions in each tax year (or 100% of earnings if lower). If you’re a high earner, it may be less, depending on how much you earn.
However, there is a way to mop up previous years’ allowances, providing some individuals – for example, the self-employed, if they have had a particularly good earnings year – with the opportunity to make a significantly larger pension contribution in a single tax year. As long as you have already maximised your allowance for the 2020/21 year, you can go back and carry forward any unused allowance from the last three tax years. All told, you could potentially add up to £160,000 to your pot, if you have the earnings to support it.
If you’ve made the most of your allowances this year, consider topping up your spouse’s pension, or paying into a child’s pension. Even if your spouse or child is a non-taxpayer, he or she will still enjoy basic rate tax relief on contributions up to £2,880 a year.
Paying in can reduce your tax bill
As pensions tax relief on personal contributions is automatically paid at 20%, if you are a higher or additional rate taxpayer, you are able to claim the additional 20% or 25% in your Self Assessment tax return. The further tax relief is paid to you as a cash sum upon completion of your tax return. So, by paying more into a pension, you will pay less tax, meaning you will have even more to put towards your retirement.
The assumptions you made when you first took out your pension may not be the same today, or your portfolio of underlying investments may have changed in nature, so it’s worthwhile getting good financial advice to make sure your investment strategy is still right for you.
While the idea behind a pension is simple, making the most of it is a complex art. Speak to your St. James's Place Partner for advice.
Five things to consider:
Start saving into a pension as early as possible, even with relatively small amounts
If you have the ability, try to maximise your annual allowance
Carry forward unused pension allowances, if you have the earnings to support it
You can bring your taxable income down by paying into a pension
Review your investments to see if they are still appropriate
Learn more about how to start investing in your pension.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
1Retirement Living Standards, Picture Your Future, 2019