The question should be easy to answer.
Pay as much as you could possibly afford into your pension. After all, it can be one of the most rewarding investments you ever make. And the larger your pension pot, the better off you may be when you retire.
The government wants to help you save for your retirement, so it provides valuable tax concessions. But there are limits on the government’s generosity, and practical considerations need to be given to the amount you put away for the future.
We look at what those limits are, and how you could plan for the retirement you need.
How much can you afford?
You could pay in every penny you earn into your pension to maximize your future prospects, but that may not be affordable. A careful look at your monthly budget should show you how much you can afford.
Your pension might have to provide you with the income you need for the lifestyle you want, for many years. It might make sense to cut your current expenses to pay in more. A smaller car, holidays somewhere a little less exciting. A few sacrifices now might be preferable to having to make painful cuts in the future.
How much can you actually pay in?
Technically, you can pay in as much as you like to a pension pot, but not all of it would be tax efficient. The pension annual allowance is a limit on the amount that you can contribute to your pension each year, while still receiving tax relief. It’s based on your earnings and is capped at £60,000. So, the maximum you can contribute and still receive tax relief, is your annual salary, or £60,000, whichever is the lower.
Higher earners have a lower annual allowance limit, called the Tapered Annual Allowance. Since 6 April 2023, people who have taxable ‘threshold income’ over £200,000 and ‘adjusted income’ over £260,000 will have their annual allowance for that tax year restricted.
The maximum reduction is £50,000 and as such anyone with an income of £360,000 or more has a Tapered annual allowance of £10,000.
If you pay more into your pension plans than your Annual Allowance, you’ll be liable to pay tax based on the difference.
But you may be able to carry forward any unused allowance from the previous three years to allow larger contributions, which will still receive tax relief (the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.)
If someone flexibly accesses their retirement savings, they’re subject to the money purchase annual allowance (MPAA), which is currently £10,000, which means they will get a tax charge on any pension contributions to money purchase pensions which exceed the MPAA in a tax year. There is also no facility to carry forward any unused MPAA.
But this may not be very practical for most of us.
So how much should you really pay in?
At Continuum, we don’t look at stock answers and easy calculations. We look at you as an individual, with your own needs and plans for the future.
We will work with you to help make those plans come true. That will mean working with you to understand those goals, and working out a precisely costed pension strategy to help you reach them. We’ll show you just how large your pension pot needs to be, how much you need to put in, and at ways to make those contributions work harder.
To find out how much you should pay into your pension, the answer really is simple. Call us at Continuum
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to retirement or investment strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Pension income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
The Financial Conduct Authority does not regulate taxation advice.
