Your money, your choice – Supporting your future financial requirements
You can pay into as many pension schemes as you want; it depends on how much money you can set aside. There are several different types of private pension to choose from, but in light of recent government changes the tax aspects can require careful planning. So what do you need to consider?
Building up a substantial pension pot
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions. These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement.
Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot. However, the maximum that can be contributed to all your pensions during the tax year and receive tax relief (known as the ‘annual allowance’) is £40,000.
Tax relief on pension contributions
A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions.
In the 2018/2019 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum – whichever is highest. Contributions are also limited by the current annual (£40,000) and lifetime allowance (£1,030,000).
Tax treatment varies according to individual circumstances and is subject to change.
Pension tax relief rates:
– Basic-rate taxpayers will receive 20% tax relief on pension contributions
– Higher-rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return
– Additional-rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return
– Non-taxpayers receive basic-rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600
The annual allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.
In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will however be £30,000 – taking the highest earners’ annual allowance down to £10,000.
Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.
The lifetime allowance (LTA) is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge, currently £1,030,000. What counts towards your LTA depends on the type of pension you have:
Defined contribution – personal, stakeholder and most workplace schemes – the money in pension pots that goes towards paying you, however you decide to take the money
Defined benefit – some workplace schemes – usually 20 times the pension you get in the first year plus your lump sum – check with your pension provider
Your pension provider will be able to help you determine how much of your LTA you have already used up. This is important because exceeding the LTA will result in a charge of 55% on any lump sum and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider before you start getting your pension.
It’s easier than you think to exceed the LTA. If you are concerned about exceeding your LTA, or have already done so, it’s essential to obtain professional financial advice. It may be that you can apply for pension protection. This could enable you to retain a larger LTA and keep paying into your pension – depending on which form of protection you are eligible for. We can assess and review the options available to your particular situation.
In addition to pension protection, if you have reached your LTA (or are close to doing so), it may also be worth considering other tax-effective vehicles for retirement savings, such as Individual Savings Accounts (ISAs). In the current tax year, individuals can invest up to £20,000 into an ISA.
The Lifetime ISA launched in April 2017 is open to UK residents aged 18–40 and will enable younger savers to invest up to £4,000 a year tax-efficiently – and any savings you put into the ISA before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-free, making this an interesting alternative for those saving for retirement.
There will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot – as long as the total assets are less than the LTA. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.
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