A valuable boost for retirement savings
Origen Private Client Adviser
Whenever you contribute to your pension, the Government will also add money, via pension tax relief. Pam Henley assesses the value of pension tax relief and how it can benefit your retirement savings.
How can you get pension tax relief?
Your pension contributions are instantly boosted by 20% if you are a UK taxpayer, as the Government adds tax relief to your pension contributions.
Even if you do not have any earnings, you can still make pension contributions up to a gross amount of £3,600 each year. With the benefit of the tax relief this means you only have to pay in £2,880 to achieve a £3,600 contribution to a pension.
You can also make pension contributions for others such as a partner/spouse or children. The tax relief on these contributions will be based on the marginal rate of tax of the pension plan owner, i.e. your partner/spouse or children, not your tax rate.
How does tax relief work?
Tax relief is paid at the highest rate of Income Tax that the pension planholder pays. So basic-rate taxpayers get 20% pension tax relief; higher-rate taxpayers can claim 40% pension tax relief; and additional rate taxpayers can claim 45% pension tax relief. Low earners or non-taxpayers will also receive 20% pension tax relief. There are now five tax rates in Scotland and pension tax relief will be 20% for starter and basic rate taxpayers, 21% for intermediate rate and 41% for higher rate and 46% for top rate taxpayers.
If you are paying into a pension, then your pension provider will claim back basic rate tax and add this to your retirement fund. So if you pay £80, tax relief of £20 will be added to give you a gross pension contribution of £100 into your retirement fund.
Higher rate or additional rate taxpayers can claim further tax relief through their self assessment tax return. In some cases, HMRC may adjust your tax code to give you the extra tax relief.
If you are making contributions into a workplace pension through a salary sacrifice arrangement, your salary will be reduced by the value of the pension contribution before it is subject to Income Tax or National Insurance deductions, so you won’t need to claim tax relief through a tax return. However on most Group Personal Pensions, Group SIPPS or Group Stakeholder plans you will need to reclaim any higher-rate or additional rate tax relief through your tax return.
Tax relief is a valuable boost for contributions into a retirement fund. But you should remember that you can’t normally access money in a pension until age 55 (increasing to age 57 in 2028). Pension and tax rules can change and the benefits they can provide depend on your circumstances.
Making the most of tax relief
You can get tax relief each year up to the lower of your annual earnings or your annual allowance for pension contributions. The standard annual allowance for tax year 2018/19 is £40,000, however your annual allowance may be reduced if:
· you are earning over £110,000 your annual allowance could be reduced to as low as £10,000; or
· if you have started to take income benefits from any retirement fund flexibly then you will be subject to a reduced Money Purchase Annual Allowance of £4,000.
Don’t forget that if you have used up your own annual allowance, you can make pension contributions for others. This can also be effective gifting, which will count against their annual allowance and can help to reduce your future Inheritance Tax liability.
The Government pays out approximately £38 billion in pension tax relief so this generous incentive may not continue forever. Some suggestions are being made that tax relief may be reduced for everyone to basic rate tax relief at 20% or a slightly higher figure. So it is important that you make the most of this savings incentive while it is available, particularly if you are a higher rate or additional rate taxpayer.
Keep in touch with your pension plans
You should receive an annual statement of your pension plan from your provider, but it is also important that you regularly update your Death Benefit Nomination / Expression of Wish forms for your pension plans, which show your chosen beneficiaries in the event of your death. Your nomination will be taken into consideration by Scheme Trustees when they pay out death benefits. In particular, your circumstances may be very different from when you started your first workplace pension plan, so it is important that your nomination forms reflect your current chosen beneficiaries.
Ask your Origen adviser for a regular review of your pension plans to ensure that you remain on track to retire when you want and with the income you expect to receive. Making pension contributions can be a tax efficient way to really help you and your family reach your financial goals.
This article is for information only and is not to be taken as Financial Advice.
[ Date Posted: 28/09/2018 12:18:36 ]