Pensions is not a word which excites most people! However, I urge you to spend 5 minutes of your time reading the following brief article as pensions can provide extremely effective, tax-efficient investment opportunities. Pensions are also relevant for more people than you might initially think.
Howard Goodship, chartered finanical planner in Ringwood Hampshire works with clients in Hampshire & Dorset.
Howard Goodship works with local clients in Ringwood, Fordingbridge, Burley, Verwood, Ferndown, Wimborne and Christchurch. In this article part of his Understanding Investments series he reviews the importance of pensions.
Auto-enrolment encourages people to save for their retirement
The introduction of auto-enrolment has resulted in more people saving towards their retirement in Defined Contribution Schemes than ever before. It has also encouraged competition amongst the pension providers, with an associated reduction in charges. Both a very good outcome for consumers. But it’s the tax saving opportunities pensions can offer which I would like to focus on, and I have highlighted some examples below to illustrate.
Employees, Self-Employed and Company Directors:
Each can personally contribute up to their annual earnings into their pension (or £3,600 if more) and obtain tax relief on those contributions, subject to an annual allowance limit of £40,000 (which covers both employee and employer contributions). This annual allowance limit can be tapered back to as little as £10,000 for high earners. Tax relief is available at a person’s nominal tax rate i.e. anything between 20% and 45% (even non-taxpayers receive 20% tax relief on contributions to pensions operating ‘relief at source’ such as personal pensions). In effect, pension contributions are paid in tax-free.
“Carry-Forward” can be available for the previous 3 tax years if the individual had a pension plan in place in those years. To utilise this, the current tax year’s annual allowance must be fully used and then it is possible to go back 3 tax years to utilise any unused allowances.
Companies can also contribute to a pension plan on behalf of their employees/directors, and the company’s contribution is added to personal contributions when considering the annual allowance.
Many of my employed clients aim to avoid paying higher or additional rate tax on their salary and bonus. Pension contributions enable them to mitigate these tax liabilities.
Company directors and their accountants often seek my advice on how to draw profits from their business tax-efficiently. Pension contributions are classed as a business expense so, if an employer’s pension contribution is made instead of a dividend payment to the director, this can usually save them both corporation tax on the company profits and personal dividend tax on the contribution.
Retirees and Family Contributions:
Even people who don’t work can benefit from tax relief on pension contributions up to £2,880 per annum as the government top this up to £3,600. That’s a 25% return from the tax relief alone!
Many of my older clients help their adult children and grandchildren save for retirement, especially if my clients have surplus income and/or capital.
Pension contributions made by another person still qualify for tax-relief at the recipient’s nominal rate. For example, an adult child may be a higher rate tax- payer and a pension contribution paid by their parent (who may not pay tax or only pay basic rate tax) would qualify for relief at the higher rate. This can also be effective from an inheritance tax perspective as the pension contribution is classed as a lifetime gift.
There is no denying pension legislation is complicated, and the devil is in the detail. The examples above are broad and are not meant as financial advice. However, if you would like to learn more about the planning opportunities they could provide, please don’t hesitate to contact me.
If you are looking to save for your retirement, it is never too late to open a pension. Contact your local independent finanical adviser now or complete our booking form and we will contact you.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.