How to give your pension a pre-retirement boost
A few ideas to help you increase your chances of a comfortable retirement.
Pensions are designed to work as long-term savings vehicles, which is why you are often told that the sooner you start saving the better. Whilst that’s true, it’s also never too late to grow your pension pot, which is good news for those approaching retirement and looking to give their pension a boost.
Starting your pension as early as possible means you get the benefits of compound interest on your savings for much longer, thereby creating the opportunity to significantly enhance your eventual returns. However, due to the tax relief on contributions, even boosting your pension later in life can prove to be invaluable in helping you achieve a comfortable retirement.
As well as the opportunity for investment growth, the tax relief on pension contributions gives your pension an instant return. Tax relief effectively means that for a £1,000 contribution, basic-rate taxpayers only need to put in £800 with the other £200 provided by the government. For higher-rate taxpayers they just need to contribute £600 and additional rate taxpayers only £550.
So even if your retirement is rapidly approaching, there’s still a lot you can do to boost the value of your pension pot. And, thanks to recent changes announced in the Spring Budget earlier this year, it’s now much easier to do so.
No lifetime allowance limit
Perhaps the most notable thing the Spring Budget announced was the abolition of the pension lifetime allowance (LTA). This had capped pension savings at £1,073,100, and if you exceeded this, you were potentially liable for a punitive 55% tax charge for breaching the threshold.
The scrapping of the LTA won’t just help higher earners. It will also help more moderate savers who have been regularly putting money into their pension away over the years and have enjoyed strong investment growth.
Ostensibly, this represents a real opportunity to boost your pension pot, with one caveat – the possibility of the measure being reversed after the next general election.
Use your annual allowance
Whilst the pension lifetime allowance has been abolished, there is still a limit to the amount you can pay into your pension each year in the form of the annual allowance. However, the good news is that this has also increased.
From 6 April the annual allowance went up for the first time since 2014, from £40,000 to £60,000 - its highest level since 2011.
This means that a standard rate taxpayer can now receive a maximum sum of £12,000 of pension tax relief towards their pot, whilst higher rate taxpayers can get up to £24,000 of tax relief. Additional rate band taxpayers would get £27,000 of tax relief – a real pension boost.
A couple of caveats though. Firstly, you need to remember that you cannot pay in more than 100% of your income in that year. So to pay £60,000 into your pension, you would need to earn at least £60,000. If your income for the year is lower, say £40,000, then that will be the maximum you can pay into your pension.
Secondly, for the highest earners, there is the tapered annual allowance. From April 2023, for every £2 of income you earn above £260,000pa, you lose £1 of your annual allowance. The minimum amount that the tapered annual allowance will drop to is now £10,000.
Finally, you should also remember that if you have begun to access your defined contribution pension flexibly, the money purchase annual allowance is activated and reduces your annual allowance. The good news however, is that this has also increased, from £4,000 to £10,000.
Use the carry forward rules
If you can afford to pay in more than the annual allowance, pension ‘carry forward’ allows you to do this and still receive tax relief. This means that in the current tax year you can contribute up to £60,000 to your pension and carry forward any unused allowance from the previous three years.
However, this is still capped by your actual income for the year. So, if your earnings are £80,000 this tax year, you can only contribute up to £80,000 to your pension no matter how much unused allowance you have remaining from the previous three years.
Bear in mind too that you can use the carry forward rules if you’ve got a tapered annual allowance. However, it’s not an option once you have triggered the money purchase annual allowance.
Pay in lump sums
Your pension contributions don’t necessarily have to come from your income. You can pay in lump sums at any time, so long as you don’t exceed your annual allowance. This could be lump sums from other investments held, a windfall, an inheritance, or a bonus from work.
If it’s a bonus from work, it makes sense to talk to your employer about bonus sacrifice. In this way, you won’t pay any tax or National Insurance and the full £10,000 will go into your pot. And your employer may even pass on their NI savings too.
The alternative would be to take your bonus as part of your salary, but this would mean it would be subject to tax. For a higher-rate taxpayer, the £10,000 bonus would therefore actually be worth around just £5,800 once income tax and National Insurance have been deducted.
Review your investment strategy
As well as paying more money into your pension, reviewing your investments could also boost your returns. For example, if you have adopted a cautious approach to your portfolio to avoid exceeding the lifetime allowance, now could be the time to consider some higher risk assets in search of more attractive returns. This obviously runs counter to the accepted norm of derisking your portfolio as you approach retirement, but in the current environment it could make sense, depending on your situation.
If you are in a workplace pension, it would be worth checking out how your pension is invested, and if it’s a lifestyle approach, whether this is right for you.
Switching from higher cost active funds to lower cost trackers can also be worth considering, if the active funds are not outperforming the index.
Get in touch
If you are approaching retirement age, there is always time to increase your pension contributions. The last Spring Budget has made this even easier but the pension rules are still quite complex, so it makes sense to get financial advice to ensure you make the right decisions.
Whatever your situation, we can help you build a retirement plan that gives you more flexibility and aims to provide you with the best income possible for your later life, so please get in touch.
Please note
This article is for general information only and does not constitute advice.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.