Personal Pensions

Contributions within the annual allowance (AA) to pension funds attract relief at your marginal rate of tax. The combination of tax relief on contributions, tax-free growth within the fund and the ability to take a tax free lump sum on retirement makes a pension plan an attractive savings vehicle. Saving for retirement should always be considered as part of the year-end tax planning process.

This is particularly important for those with an annual adjusted income in excess of £260,000, since the AA of £60,000 is usually tapered by £1 for every £2 of income in excess of £260,000, reducing to a minimum of £10,000 for those with income over £360,000. No tax relief is available for contributions exceeding the available AA.

The AA can be carried forward for three tax years to the extent it is unused. Any unused AA for the three previous years can be added to your allowance for 2024/25 and will attract full relief, subject to the level of your pensionable income (‘net relevant earnings’).

Planning points

• If you are approaching retirement and are considering drawing benefits, take advice from a properly authorised advisor, to ensure that you understand the tax and other implications of accessing your pension fund

• Those aged 55 or over can access their pension fund flexibly, with no restrictions on the amount they can withdraw, although amounts drawn above the permitted tax-free lump sum will be taxed as income as they are drawn.

• Consider making additional contributions to your pension scheme before the end of the tax year to obtain relief at 40% or 45%, depending on whether you are a higher rate or additional rate rest of the UK taxpayer, taking care not to breach your available AA.   Scottish higher rate, advanced rate and top rate taxpayers will be eligible to obtain relief at 42%, 45% or 48%.

• Contributions are particularly tax-efficient where your income is between £100,000 and £125,140. Tax relief is available at 60% on income falling within this bracket; the relief is different in Scotland and where the income being relieved is dividend income.

• Review the availability of any unused allowance for the 2021/22 tax year, as this will expire on 5 April 2025.

• Consider making contributions of up to £2,880 to a pension scheme for a spouse or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions. For example, if you contribute £2,880, HMRC will pay in £720, giving a gross contribution of £3,600.

• Unfortunately, pensions scams are very common. They can result in the loss of all or part of your pension pot, a penalty tax charge from HMRC, or both. Before committing to any changes to your pension fund, it is vital to take proper advice. 

Abolition of the pensions Lifetime Allowance (LTA)

The LTA, which previously put a cap on the amount of tax-advantaged pension rights that you could build up without incurring punitive tax charges, has now been abolished.

The tax-free lump sum allowance remains £268,275 (25% x £1,073,100, the old LTA) unless the member holds a higher level of protection from when the LTA had previously been cut.

Planning points

• For those with large pension pots, the abolition of the LTA charge may change
  • the timing of your retirement; or
  • the level of contributions you might want to make before retiring.

Example – Angelo

Angelo is aged 58. He is employed at a senior level in his company and receives an annual salary of £210,000 (plus bonuses). He has a pension pot worth £990,000 but has no form of LTA protection in place.

In March 2022, he opted out of payments into his company pension scheme, given that he was getting close to exceeding the LTA and was therefore facing a LTA charge. [Note that the AA was £40,000 for 2022/23.]

He plans to retire in early 2025.

• In view of the removal of the LTA charge, Angelo can have further inputs to his employer’s scheme.
• So, carrying forward his two years’ worth of unused AA relief, he can have total pension inputs of up to £60,000 + £60,000 + £40,000 = £160,000 for 2024/25.

Note that the UK government has confirmed that the LTA will not be reintroduced.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.