The tax year is drawing to a close, and in part 2 of a 3-part series on tax allowances, we look at making the most of your Pension allowance for 2019/20, and how at Continuum, we can help
Tax and pensions are very much entwined and making the most of your pension can mean making the most of your tax allowances.
Of course, as with anything relating to tax, this can be complicated, and at Continuum – as experts in both tax and pension planning – we want to help.
Why is the taxman interested in your pension?
A pension is simply a savings scheme that builds a pension pot to provide an income in retirement.
With most forms of saving (with the exception of ISAs) the taxman will take a cut of the interest your savings earn, once they pass a certain level. Pensions are different, because the government wants us to prepare for our old age. So, the taxman will actually add to what you save.
He does this through tax relief. For every pound a basic rate taxpayer adds to their pension pot they will only need to pay in 80p, and higher rate taxpayers pay in just 60p. This tax relief will mean that for most of us pension saving is the best investment we will ever make.
But there are limits to the taxman’s generosity. Pension allowances represent these limits and represent the maximum we can invest each tax year. To make the most of your pension, you need to understand the Pension allowances that you are entitled to – and if you have not used them to the full, you may want to top the up before the 2019/20 tax year ends.
The annual allowance.
The annual allowance is the maximum you can invest in your pension each year. It is currently £40,000, or your entire income, whichever is the smaller.
The Lifetime Allowance
The Lifetime Allowance, or LTA is the maximum you can put into your retirement pot. It is linked to inflation, and for the 2019/2020 tax year it was increased from £1,030,000 to £1,055,000.
Again, it might seem an impossibly large figure. In practice, people on a middle income can often approach this figure after 40 years of contributions and some successful investment for growth from pension fund managers.
Of course, that is s not quite all you need to know about pensions allowances. There is an additional limit on pension tax relief for people on the largest incomes, known as tapered relief. They can still save up to £40,000 each tax year, but the taxman will limit the tax relief they can enjoy.
If you have an ‘adjusted’ income, which includes things like employers pension contributions on top of what you see on your salary slip, of over £150,000, your entitlement will be tapered off. For every £2 of income they have over £150,000, their annual allowance is reduced by £1.
The maximum reduction is £30,000. So, anyone with an income of £210,000 or more will see their annual allowance fall to £10,000.
Get some help with your allowances
Having the pension pot you need for a comfortable retirement will be very much easier if you make the most efficient use of your allowances. There are ways to reduce the impact of the taper, and certainly ways to keep building your wealth if you have already reached the lifetime allowance.
At Continuum, we will be happy to work with you to provide the solutions. Call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of your pensions and investments, and the income they produce, can fall as well as rise and you may get back less than you invested.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.
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