Most people tend to think about ISAs or CGT when it comes to end of tax year financial planning, but your pension may need some end of tax year attention too – don’t neglect it! Such an important part of your overall long-term financial plan should take pride of place on your agenda this spring.
Your pension – top up your contributions
You should make sure you check your pension contributions at least once per tax year as they can be an effective way to manage your tax liabilities. For high earners, it’s important to keep the lifetime pension allowance in mind and to remember that contributions causing you to exceed the allowance are taxable. For those not nearing the limit, upping your pension contributions can be an effective way to mitigate the impact of tax.
Know your numbers
You can contribute as much as you like into your pension, but there is a limit on the amount of tax relief you will receive each tax year; by means of an Annual Allowance which is currently £40,000. An individual can’t use the full £40,000 Annual Allowance where ‘relevant UK earnings’ are less than £40,000, although your employer still could. You may be able to, however, carry forward unused allowances from the past three years, provided you were a pension scheme member during those years. Threshold Adjusted Income limit is £200,000 and the Adjusted Income Limit is £240,000. If your income plus pension contributions exceeds the Adjusted Income Limit, your Annual Allowance is reduced by £1 of every £2 you are over the Adjusted Income Limit.
A Lifetime Allowance also places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100.
Your child’s pension
If you have children under 18, a spouse who does not work, or who may not be earning enough to pay Income Tax, you can invest into a pension for each of them. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, amounts to £3,600 a year. No further Income Tax or Capital Gains Tax is payable on the investments held in the personal pension, until your child starts taking benefits, (which currently cannot be before age 55). Remember tax rules can change and benefits depend on personal circumstances.
If a parent starts maximum pension contributions once a child is born, the contributions would cost just under £52,000 over 18 years, and this, under current rules would be topped up by around £13,000 in tax relief. Assuming growth in investments over the period, when the child reaches age 55 currently, they would have a sizable pension pot to draw upon, the spending power of which will of course depend on the passage of inflation over the intervening years.
Families thinking about how to save and invest most efficiently during 2021 shouldn’t overlook pensions for children. Even if the full allowance isn’t contributed, any money saved could still provide a valuable nest egg at retirement.
Talk to your adviser
If you would like more information on how to make sure you’re maximising yours and your child’s pension allowances, please get in touch. Your adviser will take the time to understand your objectives and advise you on the financial strategies most appropriate for you.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
Tax rates are based on current legislation for the 2020/21 tax year, which is subject to change
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