Saving for retirement - the tax-efficient way
Planning for your retirement may not be at the top of your agenda, but with the state pension in 2015/16 worth less than £10,000, it is vital to start thinking about how you will fund your life after work.
Many people do not take advantage of tax reliefs and (tax-deductible) employer contributions when building a fund for their retirement. However, personal contributions to pension schemes attract tax relief worth up to 60%, making them an ideal tax-free investment regime.
Employer pension contributions can be a tax-efficient means of extracting profit from a company, as long as the overall remuneration package remains commercially justifiable. The costs are usually deductible to the employer and free of tax and NICs for the employee.
For personal contributions to be applied against 2015/16 income they must be paid on or before 5 April 2016. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but also subject to the annual allowance. The annual allowance is normally £40,000 but due to changes to the allowance system from April 2016, some individuals may escape a tax charge if annual contributions in 2015/16 are below £80,000 and significant contributions were made before 9 July 2015.
Where pension savings in any of the last three years’ pension input periods (PIPs) were less than the annual allowance, the ‘unused relief’ is brought forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year. The unused relief for any particular year must be used within three years and only once the relief for the current year has been fully used and only if earning levels are sufficient as noted above.
From April 2016 the Government will introduce a taper to the annual allowance for those with adjusted annual incomes (including their own and their employer’s pension contributions) over £150,000. For
every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.
The overall tax-advantaged pension savings lifetime allowance is currently £1.25 million. It will fall to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective.
Your scheme managers can provide pension forecasts to help you estimate whether you are saving enough and, if not, what additional savings you might have to make in order to generate the income you will need in retirement. When you consider your retirement income, don’t forget to also assess your expenditure - many people underestimate the amount they will need to live comfortably when they stop working.
The rules surrounding pension contributions are complex, so make sure you talk to us for advice.