Why you are NEVER too old to save into a pension

Even over-60s can profit from the generous tax perks . . .

DO YOU want to boost your savings? If you use a pension, you’ll reap some very handsome rewards. And you don’t have to be earning a fortune to do so.

There’s no age limit on saving and even someone without an income can put in up to £2,880.

Everyone else can pay in as much as 100 pc of their earnings each year, up to a maximum of £40,000.

You may be wondering why anyone would do this if they’re trying to boost their incomes — and the answer is the tax relief.

You get a tax top-up at the rate of 20 pc, 40 pc or 45 pc, depending on your marginal rate.

So every £800 paid into a pension by a basic- rate taxpayer, for example, will automatically turn into £1,000. Non-taxpayers get the same deal.

As well as the automatic uplift, higher-rate taxpayers can claim back an additional £200 through a self-assessment form.

Later, when you withdraw the cash, you can take the first 25 pc tax-free. And if you’re smart, you can spread the withdrawals over several years to cut your tax bills.

Diverting any cash you can spare into a pension is sensible no matter what your age. The earlier you save, the more time your money will have to grow. Bear in mind that, by law, you cannot withdraw anything before age 55.

If you’re in or nearing your 50s, it’s particularly worthwhile using a pension, as there’s not so long to wait until you can access the cash. The growth will be limited with less time until retirement, but the tax breaks are still worth having.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says: ‘Tax benefits to pensions are still excellent, but they are slowly being chipped away at by the Government. Use them while you still can.’ TAKING AN INCOME ASIDE from the tax relief on money going in, there is a brilliant hidden tax benefit to using a pension for your savings. Mr McPhail says: ‘ You can bag the relief on contributions at your highest income tax rate while earning. ‘Then, typically in retirement you drop into a lower tax band. So while you might get tax relief on contributions at the higher rate, you can end up paying tax on the income at the basic rate.’ You can either take 25 pc of the fund as a tax-free lump sum or spread this over retirement. Those retiring in the next year or so could make quick gains. For example, a basic-rate taxpayer who put £8,000 into a personal pension today would see this topped up to £10,000 by tax relief. Say you retire in six months. You can then take a quarter of that £10,000 tax-free — that’s £2,500 — and the other £7,500 will be taxed at your current tax rate.

A basic-rate taxpayer would lose £1,500 in tax, leaving £6,000. Add this to your tax-free lump sum and you have £8,500. So you will have made £500 profit on your £8,000.

It’s vital to manage withdrawals carefully to limit your tax bills.

Figures in the Budget last week showed the taxman has raked in £2.6 billion since new rules in 2015 allowed over-55s to cash in their pensions. That was three times higher than expected. When deciding how much income to take, crunch the numbers. If you’re still earning from full-time or part-time work, you must factor this in, as well as money from the state pension, to avoid being pushed into a high tax bracket.

You can spread withdrawals over different tax years so you don’t slip into a higher tax band.

Watch out for emergency tax on lump sums. Unless it can be sure what taxes you already pay, your pension provider may be required to apply emergency tax to the payment at 40 pc or 45 pc, which you may have to reclaim.

You can do this with a form for an ‘in-year repayment’ from HM Revenue & Customs. You could also opt for a gradual refund by having your pension payouts taxed at a lower rate until the overpayment is returned.

If you are unsure about what to do, or need advice on how to invest your savings, ask an independent financial adviser. Try unbiased.

co.uk or call 0800 023 6868.

BOOST YOUR POT

IF YOU are still at work, check whether you can increase contributions to a workplace pension scheme where your employer matches your deposits. This means you get an even bigger boost to your savings.

If you don’t want to plough more money into a work scheme — or can’t — you can run a personal pension alongside it, taking out a self-invested personal pension (Sipp) with a fund supermarket such as Hargreaves Lansdown, Fidelity or Interactive Investor.

There’s a whole host available and it’s worth shopping around to find the one that suits you.

While using a pension is a sure- fire way to boost your savings, that’s not to say all of your cash should be piled into a pension scheme. It’s important to maintain a rainy day fund that you can access at a moment’s notice.

RECYCLE THE MONEY

YOU can cash in on the tax break by feeding money into a pension and withdrawing it almost immediately. But be careful with so-called pensions recycling.

This is when you start drawing an income and take more than you need, so you can reinvest that extra cash into the same pension to get tax relief again. HM Revenue & Customs introduced a rule to discourage this. Once you hit 55 and start drawing on your pension, your annual contribution allowance drops to £10,000. This figure will drop to £4,000 in April following a cut announced last year.