This is my 13th blog as part of our weekly blog series – unlucky for some – but not you, as the reader. It’s my second blog with a focus on pensions. A recent conversation with a contact similarly aged to me, highlighted the fact that for many, the world of pensions appears to be a little mystifying.
Pensions do come with rules, which can put people off, but never fear, it’s not too complicated.
Pensions are designed to help you fund your future. There are three main types of Pension: Defined Benefit (DB) and Defined Contribution (DC) and the State Pension.
- A DB pension will pay you an income for life when you retire. These are rare in the private sector but common in the public sector. (e.g. Teachers, Police, NHS etc)
- DC pensions are the ‘norm’ for the majority of people, but require you to own, understand and take responsibility of managing your own pot of money. This pot is then used to help fund your future plans.
- The State Pension has no bearing on your ability to save into a private pension – as long as you are receiving a National Insurance Credit each year, then your entitlement to the State Pension will accrue. Remember, you need 35 years of national insurance credits to receive the New State Pension in full (worth around £9k per annum)
The following notes are focused on those with DC pensions, as they’re more common and where the individual has more responsibility for the outcome and contributions.
How much can I put in to a pension?
There is an annual allowance, up to which you’ll receive tax relief and a lifetime allowance too.
Everyone starts with an annual allowance of up to £40,000, inclusive of tax relief. However, this can be reduced for a few reasons, for example if you don’t earn £40,000 or above, your annual allowance is limited to your earnings. Also, if at the other end of the spectrum and you’re earning in excess of £240,000, your annual allowance may be reduced (tapered).
- You earn £35,000. Your annual allowance including tax relief, is £35,000.
- You earn £160,000. Your annual allowance including tax relief, is £40,000.
- You earn £275,000. Your annual allowance will be tapered, but the amount will depend on a few factors like personal pension contributions and other income you receive.
These limits apply to your earned income, so if you receive dividends or a pension as part of your income mix, these don’t count as income for the purposes of pension contribution allowances.
The lifetime allowance is just over £1m. That’s a lot of money, but equally if you’ve been saving into a pension for many years, you might find you’re closer than you think. It’s not a major concern if you’re near it, but the basics are that if you crystallise (i.e. you want to access it) the whole pension and the capital value is in excess of £1,073,100, there will be an additional tax to pay.
I’ve heard about the concept of carry forward, what’s that?
If you earn over £40,000, then you could potentially utilise un-used pension allowances from the previous 3 tax years. This has several benefits
- You’ll receive tax relief in the current tax year
- Your pension gets an even greater boost
- You’re building your financial provision for later life
What about tax relief?
If you’re employed, you’ll have an employer sponsored pension, meaning between you & your employer, you’ll contribute to a pension and you’ll automatically receive the tax relief as part of the payroll process.
If you make contributions to a pension separately, then the pension scheme will claim tax relief on your behalf, but only at the basic rate. If you’re a higher or additional rate tax payer, then you can claim further tax back from HMRC (either via self assessment or writing to them)
I’m always keen to try and remind people to utilise allowances available – get saving now and use those allowances and tax reliefs. If you wake up at age 55 and think about your pension then, you’re leaving it pretty late.
I have my own limited company, what can I do?
The annual allowance applies, but not on what you earn personally. The company can contribute up to £40,000 per year into a pension for you and potentially more under carry-forward rules, subject to the contributions meeting HMRCs criteria of being wholly and exclusively.
So as a company owner, you’re in a potentially fantastic position to get your pension growing and save corporation tax for the company. If you pay yourself a small salary and top up with dividends, your company can still make pension contributions of up to £40,000.
- You can contribute up to the higher of your earnings or £40,000
- If you’re a basic tax rate payer – your tax relief is sorted
- If you’re a higher/additional rate tax payer and you make personal contributions, you’ll need to claim some tax back from HMRC
- Pension contributions are tax efficient from a personal and company perspective
Have a look at your pension projection and information and take an interest, in your future.
Pensions are a hugely valuable tool to help you save for the future, so please give it some thought. We can help you understand your retirement provisions and plan for your future, so please do not hesitate to reach out for a chat.
Thanks for reading and