This month, Pension Awareness Day is on 15th September. The campaign was set up to address the nationwide misunderstanding and reluctance of saving for the future. To mark the day, let’s help to improve pension awareness by sharing the most commonly asked questions that we receive at CRM.
What tax relief can I get on my pension contributions?
There are annual and lifetime limits on the amount of tax relief you can get on your pension. The current limits are the lower of 100% of your earnings or £40,000 annually. It is worth noting that employer contributions (including those made by your own limited company if applicable) are not restricted to your earnings, but only to the £40,000 (or lower – please see later) limit. Tax relief won’t apply to contributions you make above this limit and income tax charges will apply. You can carry forward unused allowances from the previous three years if you were a member of a pension scheme for those years, whether or not you contributed in those years at all.
As is often the case, there are exceptions to this rule; if you begin to draw money from your Defined Contribution pension, then the annual allowance reduces to £4,000. If your income is £150,000 or more including pension contributions, the allowance also reduces.
Do I get tax relief as a non-taxpayer?
If you earn less than £3,600 per year, you still qualify for tax relief on your contributions, as long as you pay no more than £2,880 net into your pension. On personal and stakeholder pensions, tax relief of £3,600 will be paid in whether you have an income or not. This is not the case with all workplace schemes.
What is carry forward?
You can pay more than the annual allowance into your pension and still receive the tax relief. This can be useful for self-employed people whose earnings fluctuate or if you want to make sizeable pension contributions. If you were a pension scheme member for the past three years and you’ve used your current year’s allowance, you can carry forward any unused allowance from the previous three years.
You need to make the maximum contribution of £40,000 (in tax year 2019/20); you can’t receive tax relief on contributions in excess of your earnings in any tax year and you can get the higher rate tax relief.
How much should I contribute to a pension?
You should be saving as much as you can afford to put away each month, and the sooner you start saving the better. A very rough guide commonly used is to take the age you start your pension and half it for the %age amount you should contribute to your pension. For example, if you start a pension at 28 you should contribute 14% of your salary during your working years (this includes your employer contribution).
The longer you delay, the more you’ll need to contribute to achieving your retirement amount. Don’t forget that if you have a pay rise, you should increase your contributions by the same %.
How much can I build up in my pension?
In the current tax year, there is a lifetime allowance of £1,055,000 that is the top limit of the pension value you can take before having to pay a tax charge. The tax charge is 25% if paid as income or 55% on a lump sum.
With such a huge topic and a minefield of regulations, it’s often best to speak to the experts. If you have questions that aren’t covered by our services, we will happily put you in touch with independent financial advisers. Contact CRM on 01865 379272.
