New tax year. Is your pension ready?

The next tax year starts on 6 April, so you have about a month to boost your pension savings.

Pensions are usually the best way to save for retirement, so you’ll want to make the most of your allowances.

Most people can put away up to £40,000 for the current year PLUS the three previous ‘carry forward’ years. This gives a maximum allowance of £160,000 LESS any contributions that have already been paid into the scheme by you, your employer, or a third party.

Of course, there are some exceptions that make things more complicated. And there are lots of acronyms to become familiar with.

We’ll make it as clear as possible…

If your pension is in a defined benefit scheme, your annual allowance isn’t calculated on contributions. Instead, it’s based on the annual benefit that’s been earned under the scheme over the tax year.

If you’re a high earner, your allowance may be less than £40,000 due to ‘tapering’. Again, it’s complicated. For this tax year and last tax year, the allowance is calculated on adjusted income (AI) over £240K and threshold income (TI) over £200K. The previous limits were £150K AI and £110K TI.

  • AI is employment, savings income, and employer contributions that are subject to tax
  • TI is other income that is subject to tax, less your pension contributions and any employer contributions which were made by a salary sacrifice arrangement set up since 8 July 2015

If you’ve made a personal contribution that brings your TI below £200K, you will counter tapering and benefit from the maximum allowance.

(See, we told you it was complicated.)

If you have a money purchase pension and you’ve already started drawing taxable income from it, your annual allowance is limited to £4,000 (it’s called the Money Purchase Annual Allowance or MPAA).

Tax relief and earnings

Even if you have unused allowance, you won’t get tax relief if you pay in more than you’ve earned that tax year.

Here are some ways around that:

  • If you own a limited company and you don’t pay yourself much salary, you can make a tax-deductible ’employer’ contribution – but this could be limited by the annual profits of the business
  • If you are an employee, you might be able to enter a salary or bonus sacrifice scheme. This saves on National Insurance for you and your employer, and they may be willing to boost their contribution. However, it won’t reduce TI and counter tapering for high-earners

What about ISAs?

If that’s all a bit complex, you might be wondering whether ISAs are still a good idea.

The short answer is yes. You will probably want to put your savings into ISAs as well as pensions, because they both protect you from income tax and CGT.

However, pensions benefit from income tax relief on the way in AND tax-free cash on the way out, so they usually:

  • Provide higher net income than ISAs
  • Make family wealth transfer easier
  • Generally protect savings from IHT
  • Allow beneficiaries to draw money down with extended IHT protection
  • Remain tax-free for investment income and gains

What this means to you

While you’re still working, you can put any unspent income into your pension. As soon as you stop working and earning, you’ll need to start drawing your pension down so you have enough money to live on.

Therefore, the best thing to do now is to put as much money as you can into your pension, while you can. We’re experts in pensions as well as other types of investment. If you need further information, please give us a call and we’ll do what we can to help.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100