As the end of the tax year approaches and the new pension rules come into effect in April, here at Marchwood IFA we have identified 7 reasons why you might want to consider making the most of your pension contributions now. If you are interested in doing so, you should take the advice of a fully qualified pensions advisor to help you make the right decisions to achieve your retirement goals.
Remember that higher rate (40%) tax payers and additional rate (45%) tax payers who use the full £40,000 pension annual allowance can convert a tax bill of £16,000 (40% of £40,000) into their own retirement savings.
1. Immediate access to savings for the over 55s
The new flexible pensions rules from April will mean that anyone over 55 will have the same access to their pension savings as they do to any other investments. With the combination of tax relief and tax free cash, pensions may well outperform ISAs on a like for like basis. So if you are over 55, you should at least consider maximising your pension contributions before saving through other investments.
2. Providing for loved ones
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no IHT payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.
You might want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you’re not in serious ill-health at the time, any savings will be immediately outside the estate, with no need to wait 7 years to be free of IHT.
3. Get personal tax relief at top rates now in case you earn less next year
If you are a higher or additional rate tax payer this year, but are uncertain of your income levels next year, a pension contribution now will secure tax relief at your higher marginal rates.
Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next.
For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.
4. Don’t lose your £50,000 allowances from 2011/12, 2012/13 and 2013/14
Carry forward for 2011/12, 2012/13 and 2013/14 will still be based on a £50,000 allowance. If you have contributed less than £50,000 (annual allowance) in total to your pensions in any of the past three years, the carry forward principle allows you to make up for that.
But as each year passes, the new £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And there could be further cuts.
5. Use next year’s allowance now
You may be willing and able to pay more than your 2014/15 allowance in the current tax year – even after using up all your unused allowances from the three carry forward years. Perhaps you’ve had a particularly high income for 2014/15 and want to make the biggest contribution you can with 45% tax relief?
6. Avoid the child benefit tax charge
An individual pension contribution can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.
The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. A pension contribution reduces your income for this purpose, thus the tax charge can be avoided.
7. Sacrifice bonus for employer pension contributions
Have you been offered a bonus this year? Sacrificing bonus for an employer’s pension contribution before tax year end can bring several benefits. The employer and employee National Insurance savings could be used to boost pension funding, giving more in the pension pot for every £1 lost in ‘take-home’ pay. In addition, your taxable income is reduced, potentially taking you under a specific tax threshold which could mean avoiding the child benefit tax charge.
Pensions planning is a complex area and one where you should always take the professional advice of a fully qualified independent pensions advisor. Please call Marchwood IFA now and ask us to review your pension arrangements. We can help you make the right decisions to help you achieve your retirement goals.