Don’t miss tax breaks
LAST-MINUTE PENSION PLANNING
THERE are just a handful of days before the current financial year ends but that still gives investors enough time to top up their retirement savings while also cutting their tax bills.
A host of tax allowances expire every year on April 5 and pension allowances offer some of the biggest savings,aj
Bell’s head of retirement policy,tom
Selby said: “It’s crucial to make the most of your pension tax breaks and matched contributions, while being aware of potential pitfalls.”
One of the biggest benefits of saving in a pension is that you get upfront tax relief, which immediately boosts the value of your fund. Selby said: “If you pay £80 into a personal pension, that will lift your contribution to £100. Higher-rate taxpayers can claim back an extra 20 per cent on their tax return and additional rate taxpayers 25 per cent.”
Workplace pensions should be further boosted by a contribution from your employer, which can double your money once tax relief is added, too. “Better still, from age 55 you can take 25 per cent of your fund tax-free, with the remainder taxed as income.”
These three tax breaks make pensions extremely attractive, and your money will grow free of tax while you wait to start drawing it. “Anyone with cash to spare
should consider making the most of their available pension allowances before the tax year ends onwednesday,” Selby said.
Under the pensions annual allowance, everyone can contribute up to 100 per cent of their income into a plan, to a maximum of £40,000.They can also carry forward any unused allowance from the previous three tax years, provided they belong to a pension scheme in that time, worth up to £120,000.
From April 6, the annual allowance rises to £60,000, giving savers even more scope to squirrel money away tax-effectively. “Carry forward can be particularly useful for business owners or anyone who is trying to make up for lost time saving for retirement,” he said.
If self-employed, paying profits into a pension instead of taking them as salary is a great way to lower your tax bill, as you avoid paying income tax and National Insurance on the money, as well as 13.8 per cent employer NI.
Finally, pensions are a handy way to reduce your inheritance tax exposure, as they fall outside of your estate. “Unused pension can be passed on entirely tax-free if you die before age 75.” If you die after age 75, beneficiaries will pay income tax on any withdrawals, at their marginal tax rate. “Pensions now provide a way of passing money down the generations, with the taxman potentially not seeing a penny of it,” Selby added.
The pensions lifetime allowance is abolished from April 6, making the pensions system much simpler and reducing the risk of incurring a 55 per cent tax charge on larger pension pots.
“If you’re at risk of being hit with a lifetime allowance tax charge, wait untilapril 6 to ‘crystallise’ your pension, which typically happens when you either take your tax-free cash, enter drawdown, buy an annuity or draw a lump sum direct from your pot.”
Once you start making pension withdrawals, the amount you can pay in again is reduced under the money purchase annual allowance (MPAA), designed to stop people from constantly recycling pension to generate tax relief.
This is currently £4,000 but will increase to £10,000 from April 6, giving older workers extra flexibility to build their retirement savings. “The MPAA is still well below the £60,000 annual allowance, though, so bear that in mind before first crystallising any pension.”
Finally, keep death benefit nominations up-to-date, Selby added. “This helps ensure the right people inherit your pot.”