With less than three months to go before the new pension changes becomes reality, maybe forgiven for not thinking about investing money again into your pension. However, as the legislation is now more or less in place, you may be thinking, how can get the most out of my pension before we get to April.
To help out here, we have 7 reasons why boosting your pension pot before the tax year end may be a great idea.
- You can get immediate access to your pension fund from age 55
The new rules from April will mean that if you are over 55 you will have the same access to your pension savings as you do to any other investments. And with the combination of tax relief and tax free cash, pensions will be more tax efficient than ISA’s for many investors. There will potentially be tax implications, but your will soon have more options.
- Additional funds will mean you have a bigger fund
If you are looking to take advantage of the new income flexibility you may want to consider adding to your fund before 5th April. If you add more funds to your pension after the 6th April your annual allowance may reduced to £10,000.
But remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility. Anyone in capped drawdown before April, or who only takes their tax free cash after April, will retain a £40,000 annual allowance.
- Pensions are an effective Inheritance Tax shelter
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to the next generation in your family – usually there is no Inheritance Tax payable, so passing on remaining funds in your pension to the next generation free of tax if you die before deaths below age 75 is a potential attraction.
You may wish to consider moving money from investments which would could be subject to Inheritance Tax, into your pension to shelter funds from Inheritance Tax, as well as benefit from tax free investment returns. So long as you are not in serious ill-health and about to die, any investment into your pension will be immediately outside your estate, with no need to wait 7 years to be tax free.
- Tax relief at your highest rate of tax
If you are higher or additional rate tax payers this year and are uncertain of what your income will be next year, a one off pension contribution now will secure tax relief at your highest rate of tax. If you are unsure what income you will have next year, this may be a great opportunity to add some value to your pension. If you are a higher rate taxpayer this year, you will receive tax relief of 40% on the amount you invest. For example a £40,000 contribution would effectively cost you £24,000.
- You may still have £50,000 allowances from 2011/12 and 2012/13
Carry forward for 2011/12 and 2012/13 is based on a £50,000 annual allowance. However the annual allowance is now £40,000, so if you do not use the unused relief it will be lost. You could potentially invest up to £190,000 into your pension for this tax year without causing an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. Additionally if the annual allowance is reduced further, then you will not be able to invest as much into your pension as you can now.
- Have you lost your personal allowance?
Another benefit of making a pension contribution is to reduce your taxable income. You can make a pension contribution so that you retain your personal allowance.
If you are a higher rate taxpayer with taxable income of between £100,000 and £120,000, you will have lost your personal allowance. If you made a contribution of £20,000, this would mean that you would still receive your full personal allowance. So if your income is over £100,000, making a large investment into your pension is a very effect way of retaining your personal allowance.
- Are you having to pay child benefit tax charge?
If you make an additional pension contribution you can ensure that you keep your child benefit, rather than being lost to the child benefit tax charge.
You will start to lose child benefit if the taxable income of the highest earner in your family is more than £50,000. And if they are earning more than £60,000 you will lose it altogether. You will however retain child benefit if the highest earner has income of £50,000 or less. So a pension contribution that reduces your income to £50,000 or below, will mean that you will keep child benefit.
What next: Having enough money in retirement is a massive challenge for just about all of us. The first step in ensuring that you have enough, is to work out how much you would need if you where retiring now. If you don’t know what you need to live on now, then working out how to get there is going to be difficult. Get this step worked out now is a massive help in deciding what investments need to be made for the future.
To get the best value for your investments and savings, we recommended that seek professional advice from a qualified financial adviser.
Contact Martin Dodd on 01902 742221 or email him at martin.dodd@miadvice.co.uk if you would like talk about money issues.
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