Essential pension planning for a secure retirement: Key strategies and tax considerations
Why Pension planning matters
Effective pension planning is crucial to ensuring a financially secure retirement. By understanding and making the most of the available pension tax allowances, you can set yourself and your family up for long-term financial success.
This article covers key pension strategies, legislative changes, and practical tips on maximising your pension savings.
Upcoming Pension changes you need to know
From 6 April 2027, pension funds, possibly including unspent funds left in a scheme, will no longer be exempt from Inheritance Tax (IHT) when the scheme member passes away. While the exact rules are yet to be confirmed, it’s important to start planning now to minimise potential tax liabilities.
Maximising Pension contributions for Tax relief
The current annual limit for income tax relief on pension contributions (both personal and employer) is £60,000. To qualify for this relief, your taxable earnings must be at least equal to your personal contributions.
- Basic rate taxpayers receive 20% relief automatically via the pension scheme.
- Higher and additional rate taxpayers can claim further relief via their tax return (unless using salary sacrifice, where relief is applied at source).
Carry forward unused Allowances
If your income allows, you can contribute more than the £60,000 annual limit by carrying forward unused allowances from the previous three tax years .
For those without earnings, you can still contribute £2,880 net, which becomes £3,600 gross with basic rate tax relief.
Tip: Consider voluntary Class 3 National Insurance contributions to enhance your State Pension entitlement.
Avoid over-contributing: Watch your Allowances
Although there is no longer a lifetime limit on pension benefits you can accrue (see below), exceeding certain thresholds can still trigger tax charges.
Understanding the Lifetime Allowance (LTA) abolition
The Lifetime Allowance (LTA) was abolished in tax year 2023/24, removing the cap on total pension savings that could benefit from tax relief.
- Previously set at £1,073,100 (2022/23), it had been as high as £1.8M in earlier years.
- While the LTA no longer applies, it still affects the maximum tax-free lump sum you can withdraw.
- If your pension savings were close to or exceeded the former LTA, it’s wise to seek personalised financial advice.
Tapered Annual Allowance for high earners
Since 6 April 2023:
- If your adjusted income (including employer contributions) exceeds £260,000, your annual allowance is gradually reduced.
- At £360,000+ income, it tapers down to just £10,000.
- Contributions above this amount incur a tax charge, payable via your Self Assessment tax return or through your pension provider (subject to deadlines).
Money Purchase Annual Allowance (MPAA):
Also be aware of the £10,000 MPAA limit if you’ve accessed flexible pension benefits and continue contributing to a different pension.
Flexible retirement options: More than just annuities
Since April 2015, retirees have greater freedom in how they access their pension savings. From age 55, you can:
- Take up to 25% of your pension fund tax-free.
- Leave the rest invested in pension drawdown, and only pay income tax when withdrawing funds.
Key considerations
- Taking large sums early may push you into a higher tax bracket.
- Phased withdrawals may offer better tax efficiency.
- Defined benefit (final salary) pensions offer higher benefits but less flexibility, and limited inheritance options.
Advice is essential before transferring a final salary pension to a more flexible scheme.
Boost your Pension with help from others
While there's no crowd-funding for pensions yet, there are two powerful ways to grow your pension at no or reduced cost:
- Employer or business contributions
If you're a company director, your business can make tax-efficient contributions, potentially saving up to 26.5% in corporation tax.
- Salary sacrifice or contribution negotiation
Employees can:
- Use salary sacrifice for efficient contributions.
- Benefit from grossed-up contributions, especially as higher-rate taxpayers.
Example:
A £10,000 net contribution becomes £12,500 gross with tax relief, reducing the effective cost to just £7,500 after higher-rate relief with HMRC covering the rest.
A £10,000 net contribution becomes £12,500 gross with tax relief, reducing the effective cost to just £7,500 after higher-rate relief with HMRC covering the rest.
Pensions for children and grandchildren
All UK residents, even babies, can have a pension.
- You can contribute £2,880 net / £3,600 gross annually to a child or grandchild’s pension.
- These contributions may count as a Potentially Exempt Transfer (PET) for Inheritance Tax purposes.
- This is an excellent way to use your £3,000 annual gift allowance while securing your family’s future.
What happens to your Pension when you die?
If you die before age 75:
- Your nominated beneficiaries can receive the pension tax-free as a lump sum or income.
If you die after age 75:
- Inherited pensions are taxed at the beneficiary’s marginal income tax rate.
- If the beneficiary dies before 75, any remaining pension may revert to tax-free status.
These rules apply to Defined Contribution pensions, not Defined Benefit (final salary) schemes.
Speak to Azets Wealth Management
If you have questions or want to explore your retirement planning further, our Azets Wealth Management team is here to help.
