Pensions are a tax-efficient way to save for retirement, but not everyone is aware how they can maximise the tax advantages pensions offer. In this article Swindells Financial Planning, pension advice experts based in Seaford & Uckfield, Sussex describes four opportunities it is worth considering to make your pension provision work for you.
The primary purpose of a pension is to accumulate funds for your retirement in a tax-efficient manner. However, a pension can also help you claim back your valuable personal tax allowance and other state benefits, maximise tax relief on contributions before you retire and manage your income tax bill whilst in retirement.
Pension law and regulations are a complex area, despite several ineffectual attempts by successive Governments to try and simplify pensions. It is therefore vital that you have a pension advice expert, such as Swindells Financial Planning, to show you how you can benefit from the tax advantages of pensions and not lose out on potentially thousands of pounds worth of tax-savings.
Personal allowance for high earners
The personal allowance is reduced by £1 for every £2 of taxable income over £100,000. Therefore the current personal allowance of £8,105 (2012/13 tax year) would be completely lost once taxable income reaches £116,210, meaning more of your income is taxable at the higher and additional rates.
By making a pension contribution you can reduce taxable income and get back your tax free personal allowance. Particularly useful if you have taxable income of between £100,000 and £116,210, where this can result in tax relief at an effective rate of 60%.
Erosion of child benefit
From 7 January 2013, if a parent earns in excess of £50,000, child benefit reduces and is completely eroded once earnings hit £60,000. A pension contribution can help reduce earnings below this level and allow child benefit to be reclaimed.
Maximising tax relief on contributions but minimising tax on pension income
With expert pension and retirement advice you may be able to receive tax relief at a higher rate whilst building you pension pot than the income tax rate you will pay when it comes to taking your retirement income.
You could receive tax relief on your pension contributions at a rate of 40% or 50% but pay a lower rate of income tax in retirement via the use of income drawdown and phased retirement strategies as an effective way of controlling pension income and taxation in retirement.
Paying in excess of the £50,000 annual allowance but avoiding the tax charges
In certain circumstances you could pay in excess of the pension contribution annual allowance, which is currently set at £50,000 per tax year, without penal tax charges applying on the contribution in excess of the annual allowance.
Using “carry forward” you can sweep up unpaid contributions from the previous three tax years. However, the rules are complex and you should seek advice in this area, which Swindells Financial Planning can provide.
If you would like to discuss any of the areas highlighted here further or have any other pension and retirement planning queries, please do not hesitate contacting us using the Book a Consultation form below, emailing seaford@swindellsfinancialplanning.co.uk or calling us on 01323 894 202.
