It’s never too late to grow your pension pot. Rachel Lacey has some great ideas to increase your chances of a comfortable retirement, even if you think you’ve missed the boat.
Pensions are very much long-term savings machines. How often have you read that the sooner you start saving the better?
But while there’s lots to be said about the benefits of starting early and drip-feeding moderate sums into your pension throughout your working life, tax relief on contributions means pensions aren’t that shoddy in the short term either.
Before you even factor in investment growth, this government top up gives your cash an instant return. Tax relief effectively means a £1,000 contribution only costs basic-rate taxpayers £800, higher-rate taxpayers just £600, while additional rate taxpayers only need to stump up £550 to invest the same amount.
So even if your planned retirement feels like its rapidly approaching, there’s still much you can do to substantially boost the value of your pot. And, thanks to recent changes announced in the Spring Budget, it’s now much easier to really pump cash into your pension.
Say goodbye to the lifetime allowance
From 6 April this year, there is no longer any limit on the eventual value of your pension. The lifetime allowance, which had capped pensions at £1,073,100, was scrapped in the Spring Budget and means there will no longer be a punitive 55% tax charge for breaching the threshold.
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The decision won’t just help senior public sector workers (such as doctors and headteachers whose defined benefit pensions’ values are calculated differently to those in defined contribution schemes) and higher earners in the private sector. The move will also help more moderate savers who have been squirrelling money away over the years and have enjoyed strong investment growth.
Work your annual allowance
While there is no longer any cap on the amount your pension can grow to, there is still a limit to the amount you can pay in each year, in the form of the annual allowance.
However, from 6 April the annual allowance is to go up for the first time since 2014, from £40,000 to £60,000 - its highest level since 2011 (when it was cut from £255,000 to just £50,000).
There are a number of caveats to be aware of though. Irrespective of this cap, you cannot pay in more than 100% of your income in that year. So to pay in £60,000 you’ll also need to earn a minimum of £60,000. If your income for the year is £50,000 then that will be the maximum you can pay into your pension.
Another is that the annual allowance is restricted for the highest earners. The tapered annual allowance gradually reduces the amount you can pay into your pension once your income exceeds a certain threshold.
However, after the chancellor’s pensions bonanza in the budget, the adjusted income limit for the tapered annual allowance will rise from £240,000 to £260,000 from 6 April. The minimum amount that the tapered annual allowance will drop to, also rises from £4,000 to £10,000.
There is also a different annual allowance if you have already made a taxable withdrawal from your pension. This wouldn’t apply if you’ve only taken your tax-free cash, but it would kick in if you’ve taken an uncrystallised funds pension lump sum, or UFPLS, without crystallising your pension or have started taking some regular income – for example if you are in semi-retirement.
This is called the money purchase annual allowance, but the good news is that it too is increasing from £4,000 to £10,000 on 6 April.
Take advantage of carry forward rules
If you can afford to pay in more than the annual allowance into your pension, you might be able to manage it by taking advantage of so-called carry forward rules. This enables you to ‘carry forward’ any unused annual allowance from the previous three tax years. You just need to make sure that you have earned in income what you are paying in during the current year.
You can also use the carry forward rules if you’ve got a tapered annual allowance, but it’s no longer an option once you have triggered the money purchase annual allowance.
Pay in lump sums
Pension contributions don’t have to just come from your income either. So long as you don’t end up breaching your annual allowance, you can also pay in lump sums from other investments you might have, as well as windfalls. You might have received an inheritance, for example, or been a given a bonus at work.
In the case of bonuses from work, it’s worth talking to your employer about bonus sacrifice.
While you might have a number of things you might want to spend your bonus on now – tax will really take its shine off. For a higher-rate taxpayer, a £10,000 bonus will actually be worth just £5,800 once income tax and National Insurance has been deducted.
However, if you ask your employer to pay it into your pension, you won’t pay any tax or National Insurance on it and the full £10,000 will go into your pot. And, if you’re lucky, your employer might even pass on their NI saving too.
You could also consider moving other investments into your pension that aren’t sheltered from tax. You cannot transfer them directly into your pension, but by using ‘Bed and SIPP’ rules it is possible to sell them and immediately buy them back within your pension – so long as all the investments are on the same investment platform. You just need to be mindful that the amount you are selling doesn’t trigger a capital gain.
When you’re paying any lump sum into your pension, it’s vital that you get the right level of tax relief.
If you are paying into your own personal pension, such as a SIPP, only basic rate tax relief will be applied automatically, so if you pay the higher or top rate of tax you’ll need to claim the outstanding tax relief you’re entitled to back through your self-assessment tax return.
Alternatively, if it’s a workplace scheme, you need to check whether it’s a net pay arrangement (pension contributions are made before you are taxed) or relief at source (contributions are taken from your pay after your wages are taxed). If it’s net pay, you should get the right amount of tax relief automatically, but if its relief at source you’ll again only get basic rate tax relief applied and will need to claim any surplus back. (Note: if you’ve used salary or bonus sacrifice, you won’t need to claim any tax relief either).
Review your investment strategy and your costs
Paying more money into your pension isn’t the only way to boost its value. Reviewing your investments could also boost your returns. This could involve investing in higher-risk assets – which could be particularly relevant if the threat of a lifetime allowance charge had forced you into adopting a more cautious approach, limiting the growth potential of your investments.
It's important you know what your workplace pension is invested in and, if it’s a lifestyle approach, whether the level of risk is right for you.
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You could also boost your returns by looking to cut the cost of running your pension. If you’re invested in actively managed funds that aren’t beating the index, it might be worth switching into cheaper passive funds. Similarly, it’s important to look at your platform charges and ensure you aren’t paying more than you need to save for retirement.
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Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.