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HOW TO MAKE THE MOST OF THE VARIOUS PENSION ALLOWANCES
by Sam Hulson of First Equitable
Saving into a pension is one of the most tax-efficient ways to save for your retirement . Not only do pensions enable you to grow your retirement savings largely free of tax , but they also provide tax relief on the contributions you make .
There are various pension allowances that you need to be aware of and understand how to make the most of . These limit the amount of money you can contribute to a pension in a year , as well as the total amount of money you can build up in your pension accounts while still enjoying the full tax benefits .
LIFETIME ALLOWANCE All your pensions , including workplace pensions , count towards the Lifetime Allowance ( LTA ), with the exception of the State Pension and overseas pensions . The standard LTA is £ 1,073,100 since 6 April 2020 and increases with inflation each year .
You don ’ t pay a tax charge until you take your pension savings over and above your LTA ( or reach age 75 , if earlier ). The charge is only on the excess money saved in your pension that is above your LTA .
NON-TAXPAYER OR EARNING LESS THAN £ 3,600 If you have no earnings or earn less than £ 3,600 a year , you can still pay into a pension scheme and qualify to receive tax relief added to your contributions up to a certain amount . The maximum you can contribute is £ 2,880 a year . Tax relief is added to your contributions , so if you pay £ 2,880 , a total of £ 3,600 a year will be paid into your pension scheme , even if you earn less than this or have no income at all .
MONEY PURCHASE ANNUAL ALLOWANCE The Money Purchase Annual Allowance ( MPAA ) applies only to money purchase contributions and has remained at £ 4,000 since 6 April 2017 . If you have taken flexible benefits that include income , such as flexi- access drawdown with income – and you want to continue making contributions to a defined contribution pension scheme – you will have a reduced annual allowance of £ 4,000 towards your defined contribution benefits .
ANNUAL ALLOWANCE The pension Annual Allowance is the maximum amount of money you can contribute towards a defined contribution pension scheme in a single tax year and receive tax relief on . All contributions made to your pension by you , your employer or any third party , as well as any tax relief received , count towards your Annual Allowance .
The standard pension Annual Allowance is currently £ 40,000 , or 100 % of your income if you earn less than £ 40,000 . A lower Annual Allowance may apply , however , if you are a high earner , or you have already started accessing your pension . High earners may potentially be subject to the Tapered Annual Allowance , while those who have already started accessing their pension potentially face the Money Purchase Annual Allowance ( MPAA ).
CARRY FORWARD Carry forward is a way of increasing your pension Annual Allowance in the current tax year . It can be used when your total pension contribution amounts for a tax year exceed your annual pension Annual Allowance limit for that year .
You can do this by carrying forward unused allowances from the three previous tax years to make contributions this year . The 2020 / 21 tax year allows use of unused allowances from 2017 / 18 , 2018 / 19 and 2019 / 20 . This would allow up to a maximum of £ 160,000 to be contributed in the current tax year .
TAPERED ANNUAL ALLOWANCE Anyone with a taxable income over £ 240,000 will have their annual allowance for this tax year restricted . This means that for every £ 2 of income you have over £ 240,000 , your annual allowance is reduced by £ 1 . The maximum reduction is £ 36,000 . So anyone with an income of £ 312,000 or more has an annual allowance of £ 4,000 .
PENSION CONTRIBUTIONS TAX RELIEF Everyone , whether working or not , is entitled to receive basic-rate tax relief at 20 % from the Government when making contributions to their pension . Depending on the type of pension , tax relief can either be a reimbursement of the tax already paid on a pension contribution or it can be the ability to put away for your pension straight out of your wage , before paying any tax .
Basic-rate taxpayers , and those who don ’ t pay tax , will earn 20 % tax relief . Higher-rate taxpayers earn 40 %. For additional-rate income taxpayers , who earn over £ 150,000 a year , tax relief is 45 %. There are other rules that apply for additional-rate payers depending on specific circumstances .
At First Equitable , we are pensions and retirement planning specialists and have many years of experience helping our clients successfully achieve their goals and objectives . If you would like some help or simply have a few questions , please give us a call or complete an enquiry form via our website .
You can also email any questions to me at : sam . hulson @ first-equitable . com wirrallife . com 35