After 40 or more years at work, many of us may be happy to have our time as our own, and to enjoy the income from our pension pot.
But what if we want to continue putting money into our pension?
Your pension can be the best investment you ever make, and you may be able to continue investing – and enjoying the potential for growth – after you retire.
Why carry on paying in to a pension?
If you are under 75 years old and have some spare cash each month, you can still put money into a pension and enjoy a boost from the taxman. There’s some good news. Even when you have retired, pensions are one of the most tax efficient investments around. The really good news is you do not have to work to make your pension work for you.
Tax boost for pension savers
Remember the government tops up your pension contributions according to the rate of income tax you pay – so to contribute £100, a 20% taxpayer only has to save £80.
For higher rate taxpayers, the news is even better. £100 of savings comes with a contribution of just £60. If you have a partner under 75, you can pay into their pension too, and they will get the same tax boost.
If you are thinking ahead, remember that unspent pension cash is passed to loved ones when you die generally free of inheritance tax and in some cases, tax free to the beneficiaries.
How much can you pay in?
How much you can pay into a private pension after you retire will vary depending on your personal circumstances. If you are not working at all the pension contribution limit is £3,600 a year, which is made up of £2,880 cash contribution plus the tax top up.
If you do work, perhaps part time as you ease back from full time employment, the annual allowance is all your wages up to a maximum £40,000 each year. If you are earning above £150,000 a year, the allowance starts to taper off. If you are earning £200,000 plus, you will only be entitled to £10,000 tax allowance.
On 6 April 2016 the government introduced the Tapered Annual Allowance for individuals with “threshold income” (individuals net income for the year) of over £110,000 and “adjusted income” (income including employer contributions) of over £150,000.
Tapered allowance can become complicated, and it is best to get some advice about exactly how it will apply to you.
Paying in to your pension if you have already taken money out
The potential confusion can come if you have already started taking money out of your pension. HMRC believe that some people take a cash lump sum from their pension pot then simply reinvest it, earning tax relief each time.
To prevent this double tax relief, they introduced the Money Purchase Annual Allowance. This ensured that once pension pots had been accessed, the maximum that could be paid into them became limited. Since April 2017 this limit has been set at £4,000
But the position is complicated. The reduced allowance only applies when a pension is accessed flexibly. You may not be affected if you take tax-free cash and leave the rest of your money untouched or buy an annuity.
So, if you take a tax-free lump sum you can continue to contribute £40,000 per tax year. However, if you take a taxable income your annual allowance would drop to £4,000 under the MPAA.
If your provider allows it, you might be able to use the ‘small pots’ rule to avoid the restriction. This allows you to take three separate pots each of less than £10,000 and retain the full £40,000 allowance.
If you have retired but want to keep on making the most of your pension’s potential to grow your money, and especially, if you have already dipped into your pension pot, you should probably seek expert advice as soon as possible. The simplest way to do that is of course to call us at Continuum or download our helpful guide to retirement.
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 pension 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 will be subject to individual circumstances and may be subject to future change.