Freedom and choice in pensions – Maximise your pension

We have previously explored the future of pension savings, but have primarily focussed on the options available when drawing pension benefits, so let’s now look at saving for retirement and how to maximise the payments you make into pensions.

Following the introduction of workplace pensions and auto enrolment there are different ways of saving now. Auto enrolment is a new law which the government introduced to help people save for retirement and it means that employers will automatically enrol their employees into a pension scheme to which they will also contribute.

Many employers are struggling to come to terms with their obligations as far as auto enrolment is concerned and Armstrong Watson are well placed to assist in this regard.

Of course, other types of pension plan are available which don’t involve your employer and we can help you choose one or make the best use of those you already have.

Whilst you pay Income Tax on your earnings before any pension contributions, each time you pay money into a pension scheme, you qualify for tax relief. This is a payment that goes into your pension savings pot on top of the payment that you make. As means of encouraging saving for retirement the government effectively provides an incentive by boosting the money you pay in. For example, if you pay in £80 you end up with £100 in your pension pot. The difference is tax relief. If you pay tax at a higher rate then you can claim extra tax relief from HMRC via self assessment.

You can pay as much as you like into a pension, but you will only receive tax relief on payments made up to 100% of your earnings per annum (subject to an annual allowance). Anything over this won’t qualify for any tax relief.

The annual allowance restricts the maximum you can pay into a pension without incurring a tax charge. In the tax year 2014/15 this is £40,000, but some people could invest up to £190,000 if they haven’t used their annual allowance from the previous three tax years. This is called carry forward and you will need to have earnings in the year you want to make the payment of at least the amount you want to pay into your pension. You also need to be a member of a UK registered pension scheme for the period that you want to carry forward the unused allowances.

If you are withdrawing an income from a pension plan or thinking of starting to take an income, these limits may not apply, so it is important that you seek advice as early as possible to ensure you maximise your pension. Contact one of our Financial Planning Consultants for guidance.