10 good reasons to top up your pension plan
First published on 10 of March 2014 • Updated 13 of March 2018
Build tax relief and tax-free growth into your retirement and pension planning and pay into your pension today, before the end of the tax year.
Coming up to retirement? Download the unbiased.co.uk pre-retirement checklist
Tax relief and tax-free growth. A harmonious pairing, which makes a pension contribution attractive at any time. This is particularly true for higher rate taxpayers using their full £50,000 pension annual allowance as they can convert a £20,000 tax bill into their own retirement savings.
To maximise your retirement and pension planning as the tax-year end approaches, we’ve identified ten good reasons for you to pay into a pension now. (And these are all based on independent pension advice, not speculation about what might happen in the future!).
1. Get personal tax relief at top rates
- If you are a higher or additional rate taxpayer at the moment, but are uncertain of your income level for next year, a pension contribution now will secure tax relief at the highest marginal rate. Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but are not confident of repeating it in the next. Flexing the carry forward and pension input period (PIP) rules gives scope to pay up to £240,000 tax efficiently in 2013/14.
2. Pay employer contributions before corporation tax relief drops further
- Corporation tax rates are falling, expecting to reach 20 per cent by 2015. So companies should consider bringing forward pension funding plans to benefit from tax relief at the higher rates
- The current rate for this financial year is 23 per cent. This will drop to 21 per cent for the new financial year, starting 1 April 2014
3. Sweep-up unused allowance from 2010/11
- Unused pension annual allowance from 2010/11 must be used this tax year – or it’s lost forever. For a 40 per cent taxpayer, this could mean a missed opportunity to save up to £50,000 at a net cost of only £30,000
- If you are already in your 2014/15 PIP and still have unused allowance from 2010/11, you could start a new contract to sweep this up. A new contract started this tax year automatically has a PIP ending on 5 April 2014 i.e. in the 2013/14 tax year
- The transitional provisions for 2011/12 PIPs that started before 14 October 2010 mean you may have more carry forward available than may appear on the surface You could still have carry forward from earlier years despite having paid up to £255,000 for 2011/12 so make sure you build this into your retirement and pension planning
4. Make the most of the £50,000 pension allowance
- The annual allowance drops to £40,000 from the new tax year. But the PIP rules mean that some savers are paying towards this limit already
- Carry forward for the three previous years, back to 2010/11, will still be based on a £50,000 allowance. Over time, the new £40,000 allowance will come into the calculation and dilute what can be paid. Up to £200,000 can be paid into pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 — if the allowance stays at £40,000. And don’t ignore the risk of further cuts. Seek regular independent pension advice to ensure you’re up to speed on the latest rules
5. Use next year’s allowance now
- You may want to pay more than your 2013/14 allowance – even after using up all your unused allowance from the three carry forward years. To get round this, you can pay against your 2014/15 allowance before 6 April by closing your 2013/14 PIP early. This opens up your 2014/15 PIP — allowing an extra £40,000 to be paid in this tax year
- This might be good advice if you have a particularly high income for 2013/14 and want to make the biggest contribution you can with 45 per cent tax relief. Companies who have had a particularly good year and want to reward directors and senior employees and reduce their corporation tax bill could also take advantage of this
6. Recover personal allowances
- Personal allowance. If you are a higher rate taxpayer with taxable income of between £100,000 and £118,880, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60 per cent. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40 per cent and 60 per cent
- Age related element of personal allowance. If you are between the age of 65 and 74, a pension contribution reducing taxable income to below £26,100 will reinstate the age related element of your personal allowance. The full amount of the age related element is £1,060 in 2013/14 – saving you £212. But the allowance is wiped out once income exceeds £28,220
7. Avoid the child benefit tax charge
- An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the new child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other
- The child benefit, worth £2,449 to a family with three children, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution, plus the child benefit tax charge saved, can lead to effective rates of tax relief as high as 64 per cent
8. Sacrifice bonus for employer pension contribution
- It’s bonus season again. Sacrificing bonus for an employer pension contribution before the tax year end can bring several positive outcomes
- The employer and employee NI savings made could be used to supercharge pension funding, giving more in the pension pot for every £1 lost from take-home pay. And your taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge
9. Boost SIPP funds now before moving to flexible drawdown
- If you are considering a move to flexible drawdown in the new tax year, the remainder of this tax year is your last opportunity to make tax efficient pension savings
- Careful retirement and pension planning is required as no pension contributions can be made in the year flexible drawdown starts. And contributions in the tax years after all suffer the annual allowance tax charge
10. Fund and protect above the new £1.25M lifetime allowance (LTA)
- With the lifetime allowance set to fall to £1.25m from April 2014, you may be weighing-up the pros and cons of electing for the new ‘fixed protection 2014′ to lock into a £1.5m LTA. But you’ll have to stop paying into pensions after 5 April 2014. So this only leaves a short window to maximise your tax efficient contributions towards your LTA and build a bigger retirement pot to protect
- In addition to fixed protection, you will also be able to choose ‘individual’ protection. This will give an LTA of between £1.25m and £1.5m but, unlike fixed protection, further savings can be made. A fund of £1.25m or more as at 5 April 2014 is needed to choose this option and so further saving towards before this date may be needed to ‘get over the line’ of the lifetime allowance cut-off.
Want to see if you could save more? Use our Tax Waste Calculator to work out what you could be wasting.
About the author
Alan Smith is the CEO of Capital Asset Management. His specialisms include: wealth management, strategic financial planning and creative tax planning.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.