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Whether you’ve just started saving into a pension plan or have been doing so for a while, tax benefits can play a big part in helping boost your pension pot - potentially giving you more money to help you make the most of your retirement.
So with tax year end approaching, now may be a good time to pay more into your pension plan and make the most of those valuable tax benefits.
Although not all pension schemes provide tax relief in the same way, most UK taxpayers get tax relief on their pension payments based on the rate of income tax they pay.
In a nutshell, this is what makes pension plans such a tax-efficient way to save money for the future.
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Taking advantage of these tax benefits now could really make a big difference to your future pension pot.
Check out our ‘Top tax tips to make the most of your savings’ and see how you could take advantage of tax relief.
You can also read Information about tax relief, limits and your pension for more information.
The annual allowance is the total that you, your employer and any third-party (such as a spouse or a parent) can pay in across all your pension plans in a tax year. For most people this is £40,000, although it can be lower if you’re a very high earner or have already started to take income from your pension pot.
The good news is that if you haven’t used your full annual allowances in the last three tax years, you may be able to carry forward any unused allowances to use in the current tax year – and that can add up.
You can save as much as you want into your pension plan – but if it exceeds a certain amount, you may be hit with a tax charge once you start to take money out. This is called the lifetime allowance.
From 6 April 2021, the lifetime allowance is expected to rise from £1,073,100 to £1,075,800. This increase is good news if you’re nearing the current threshold.
Think about saving as much as you can reasonably afford into your pension plan to make the most of your annual allowance, any employer payments and tax relief.
Saving as much as you can for as long as you can, and making the most of the tax relief available, gives your money more opportunity to grow in value over time.
When it comes to savings it’s all about having the right mix. Pension plans and ISAs (Individual Savings Accounts) are both tax-efficient ways to save and can work well together to meet different needs.
If you’re close to retirement or retiring, and thinking about how you can pass your wealth on, you might want to consider putting your ISA or other savings into your pension plan.
Pension savings aren’t normally part of your estate so your loved ones won’t pay any inheritance tax, making this is a good option if you don’t intend to use this money yourself. Bear in mind that if you take money out of your pension savings, generally you’ll pay income tax on anything above the 25% tax-free allowance, while withdrawals from ISAs can be taken tax free but ISAs are included in your estate.
Take a look at our at-a-glance guide to check what both pension plans and Stocks & Shares ISAs can offer.