With 5 April fast approaching, now could be a good time to get to grips with tax-saving opportunities which could get you closer to your saving target.
Many experts say you should try to save ten times your annual salary by the time you retire. That may sound like a lot, but making the best use of your various tax breaks could make your retirement savings grow more rapidly than might otherwise be the case.
If you've already started saving towards your retirement, you're ahead of the game. But chances are there are things you can do to bring your retirement goals closer to fruition. So maybe think about boosting your pension savings now to benefit from current rates of tax relief.
Money that you invest today has longer to benefit from the miracle of compound interest. That magic ingredient can potentially turn a small savings pot into a significant one, and allow you to enjoy a higher income when you stop work.
You’ve got two weeks to pay into your pension and secure this year’s tax relief, boosting the value of your contributions that can grow tax-efficiently.
How pension tax relief works
Tax relief is money that the government gives you back for making pension contributions from taxed income. It is available on any top ups and regular contributions you make, provided those contributions are made to a UK registered pension and you’re under the age of 75.
With all personal pensions, you get an automatic top-up for basic rate tax relief. That money is paid directly into your plan by your pension provider. So, if you’re a basic rate taxpayer and have £4,000 to invest in your pension as a lump sum, you'll get £1,000 in tax relief on day one. That’s a very quick boost on your initial contribution.
If you’re a higher or additional rate tax payer, you can claim an additional 20% or 25% tax relief via your annual tax return. These higher rates of tax relief are applied by adjusting your tax code. Any refund will be paid via your salary, by way of a lower tax deduction.
Pensions can often seem complicated. But remember that by paying into one you’ll pay less tax at the higher rates, meaning you will have even more money to put towards your later years.
How much you can pay into your pension
You can pay in as much as you like, but you’ll usually only get tax relief on up to £40,000 of pension contributions in each tax year (or 100% of earnings if lower)*. If you’ve saved less than the annual allowance, the end of the tax year is a good time to make a lump sum pension contribution. If you’ve just received a bonus, for example, investing it in a pension could be a very tax-efficient use for it – and it could have a really positive impact on your retirement.
Using unclaimed allowances
Even if you think you’ve already used up your annual allowance, you may have an opportunity to invest more by 5 April. This is because you can mop up unused annual allowances from the previous three tax years. This could provide you with the opportunity to make a significantly larger pension contribution in a single tax year.
If you have the earnings to support it, you could add up to £160,000 to your pension pot this tax year, and you’ll benefit from rates of tax relief at 40% or 45% in the process. Thankfully, smaller sums can be carried forward too.
The last opportunity to carry forward any unclaimed allowance from the 2015/16 tax year will be 5 April 2019. If you can afford to make a larger contribution this year, you should seriously consider it. And the power of compounding could work wonders on that money in the long run.
Everyone can benefit
Even those who have little or no annual earnings receive an allowance of £2,880 a year, which will be increased to £3,600 by basic rate tax relief. This can be a useful way to save for non-earning partners. If you have children or grandchildren, you may wish to start them on the pensions journey, so they can get more money when they retire.
Get the investing part right
Finally, you should invest your contributions wisely. An effective investment strategy requires an understanding of your tolerance to risk. It also requires retaining easily accessible funds to meet your short-term requirements. But it is important to keep this ‘rainy day’ emergency money separate from the funds you are committing to your longer-term plans.
Taking time out to plan is one of the most valuable things everyone should do. We’re all time-poor, but some time invested today can make such a difference in the future.
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Nick Jones on 01743 240968, by email email@example.com or visit www.njwealthplanning.co.uk
The Partner Practice is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The title ‘Partner Practice’ is the marketing term used to describe St. James’s Place representatives.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
*There are some tighter restrictions for those with adjusted earnings of more than £150,000 a year.
Member since: 14th February 2012
I am a Shropshire based financial adviser who helps my clients manage their finances as effectively as possible. I specialise in investments, retirement planning and Inheritance Tax Planning.