Building for retirement

by | 8 March 2023

With the 5th April fast approaching, tax year-end pension contributions are a popular savings and tax mitigation tool.

Here’s a reminder of the key considerations:
  • Personal pension contributions up to £3,600 (gross) can be made if an individual does not have relevant earnings e.g. employment, furnished holiday let profits, self-employment.
  • Those with relevant earnings can contribute up to £40,000 a year; note this allowance includes employer contributions.
  • Where an individual is a member of a pension scheme but has not utilised the allowance fully from the three previous years, this value can be carried forward.
  • If a person’s threshold income exceeds £200,000 and their adjusted income exceeds £240,000, the allowance will be reduced by £1 for every £2 over £240,000.
  • The minimum allowance permitted is £4,000, this also applies to those who have accessed their pension already.
  • Some business owners look to the DB SSAS option when contributions over the permitted allowance are desired.
  • Income tax is charged through self-assessment on contributions over and above the permitted allowance.
  • Pension funds may cover the income tax charge but not always. Make sure you know the circumstances and timing required by your pension provider.
  • Higher or additional taxpayers who do not opt for salary sacrifice are entitled to further tax relief through self-assessment.
  • Those that use the salary sacrifice mechanism save national insurance as well as income tax.
  • Pension contributions can also assist those earning between £100,000 – £125,140, where the effective tax rate can be as much as 60% due to the loss of their personal allowance.
  • Parents/grandparents can contribute to a pension for their children/grandchildren.
  • It is worth consulting an Independent Financial Adviser (IFA) when considering whether to consolidate pensions.
  • The lifetime limit is currently frozen at £1,073,100, there are a number of fixed/enhanced protections which may increase this value. Charges apply for pension pots exceeding this limit.
  • The standard age of being able to access pension pots is currently 55 but this is increasing to 57.
  • A 25% tax-free lump sum can be drawn once the retirement age is reached.
  • Pension funds can be passed Inheritance tax-free; the beneficiaries may be subject to income tax when drawing the remaining value.
  • SIPPs and SSASs expand the investment options e.g. commercial property or loans to external businesses.
  • As a business owner it may be beneficial to hold commercial premises within a SIPP/SSAS, particularly if the £1m Business Asset Disposal Relief allowance has been used.

Pensions have traditionally been an attractive retirement savings option, but with some of the restrictions imposed upon high earners, many are looking to alternative options. ISAs, property, venture capital based investments should all be considered with your IFA.

***From 6th April 2023 the Annual Allowance has increased to £60,000, which in turn increases the adjusted income threshold to £260,000. The minimum allowance permitted is now £10,000 and the lifetime allowance charge has also been abolished from 6th April 2023.

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