Pay more into your pension
It can make sense to pay as much as you can afford into your pension scheme even in the year that you plan to retire. This can be particularly worthwhile if you are currently paying higher rate tax but expect to pay basic rate tax in retirement.
You see, you’ll receive tax relief at the higher rate paid on your contribution but only pay tax on income at the basic rate. Of course, you’ll also qualify for a tax free lump sum on any additional contribution.
How much can I pay?
You can obtain tax relief on any contributions you pay (or are paid on your behalf, other than by your employer) in any tax year provided they are not higher than the greater of:
- 100% of your Relevant UK Earnings i.e. broadly your earnings from a trade or profession, and
The Government has, however, introduced a £50,000 limit (annual allowance) on the maximum amount of pension savings that can be made in a tax year without paying a tax charge (this limit is being reduced to £40,000 for the tax year 2014/15 onwards). For this purpose, your pension savings are made up of any pension contributions paid by you, or on your behalf, as well as the value of any increase in your pension entitlement where you are an active member of a defined benefit scheme. Where you have not fully used up your annual allowance in the three tax years before the current tax year, you can also carry forward the unused amount to effectively increase your annual allowance for the current tax year.
Most people are unlikely to be affected by the annual allowance, but if you feel you could be, you should seek professional advice on how you can maximise your pension contributions without suffering the annual allowance tax charge.
When deciding on how much to pay into your pension you should also be aware of the lifetime allowance. This sets a limit (currently £1.5 million, but reducing to £1.25 million for the tax year 2014/15 onwards) on the value of tax relieved pension benefits you can receive during your lifetime. While most people are unlikely to be affected by this, you should seek professional advice if you feel you may be caught by this.
And don’t forget…
Increasingly, people are choosing other products to save for their retirement and you could consider these as well. For example, ISAs are a popular method. You won’t receive tax relief on your contribution, but you can take an income without paying tax and you can withdraw how much you like when you like.