With just a few weeks to go before the end of the tax year on April 5, it’s important to check you’ve made the most of any opportunities that could potentially increase your retirement income.
Here’s our rundown of some of the allowances you might want to consider using if you’re able to.
1. Can you afford to pay more into your pension?
If you have some spare savings available, then making the most of your pension allowances could be a wise move towards as we approach the end of the tax year, as your contributions will benefit from valuable tax relief.
For example, if you’re a basic rate taxpayer and you pay £80 into your pension, HMRC will top this up to £100, and if you’re a higher or additional rate taxpayer, you’ll receive even more tax relief on your contributions, which you can claim back through your self-assessment tax return. Find out more in our articles How pension tax relief works and How do I reclaim higher rate pension tax relief?.
If you do have additional money you want to save for retirement, it’s usually wise to put this into your pension sooner rather than later. When it comes to pension tax relief, there’s always speculation about when this might be reduced by the government. In addition, the longer your pot has to grow in value, the better.
There’s a limit on the amount you can pay into your pension each tax year and benefit from tax relief. This tax year you can claim tax relief on pension contributions of up to £40,000 or 100% of your income, whichever is lower. Find out more in our guide How do pension allowances work?
Your annual allowance is renewed once the new tax year starts, so it makes sense to consider paying more into your pension before then so you can make the most of both this year’s and next year’s allowance.
2. Could you benefit from pension carry forward?
If you have unused annual pension allowances from recent tax years, you may be able to use these this tax year under what are known as ‘carry forward’ rules. That’s provided you were enrolled in a pension scheme during that period. Learn more about these in our guide Pension carry forward explained.
Under these rules, you are able to carry forward unused annual allowances from up to the three previous tax years. This can amount to a significant sum and can be useful if, for example, you’ve received a lump sum from an inheritance or work bonus. Find out more in our guide What should I do with an inheritance?
If you’ve a larger lump sum that you want to pay into your pension which exceeds your pension allowances, you may want to consider spreading this over several tax years to ensure that you benefit from tax relief.
3. Should you be paying to top up your State Pension?
If you can afford to, you may want to buy missing years in your National Insurance record to boost the amount of State Pension you receive in retirement. Find out more about how this works in our guide Is it worth paying to top up your State Pension? If you’re a man born after 5 April 1951 or a woman born after 5 April 1953, you originally had until the end of the 2022/23 tax year to pay voluntary contributions to make up for gaps in your NI record back to 2006. Fortunately, the deadline has been extended by sixteen weeks to 31 July, so this gives you more time to see where you stand. After this date, the number of years you can buy falls to the last six years, so if you have missing years from decades ago you won’t be able to make these up.
Buying extra years involves paying what are known as ‘voluntary class 3 NI contributions’, and the rate is currently £824.20 for a full year (£15.85 per week), which will boost your State Pension by around £275 a year (£5.29 a week).
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: ““Buying voluntary National Insurance credits can be a very cost effective way of boosting your State Pension. Each year costs around £800 and for that you get 1/35th of your pension – around £275 per year. As long as you live three years or more after State Pension age then you have effectively made your money back.
“It is hugely important that you check before handing over any money, though, to make sure you really will benefit from making these payments. For instance you may be able to plug these gaps for free by backdating a benefit claim or if you were contracted out of the State Second Pension at any point you may find these voluntary NI credits don’t actually boost your entitlement.”
To find out how much State Pension you’re on track to receive you can request a State Pension forecast, which details how much you’re entitled to based on your current NI record, and how much you are likely to receive if you continue working up to State Pension age. The State Pension age is currently under review, and it’s set to increase to 67 by 2029 and to 68 between 2037 and 2039. However, there’s speculation that this rise may be brought forward by the government.
If you’re not on track to receive the full State Pension, currently £185.15 a week in 2022/23, and rising to £203.85 in the 2023/24 tax year, you need to check your NI record, which will show any gaps in your record since 2016.
You can use the government’s Future Pension Centre (if you’re not yet at State Pension age) and the Pension Service (if you’re already at State Pension age) to find out if you’re likely to benefit from paying voluntary contributions, and how to do this if you want to go ahead.
4. Have you set up a pension for your spouse or child?
Starting to save in a pension sooner rather than later can make a huge difference to the amount built up by retirement age, thanks to the power of compounding. Compounding essentially refers to investment returns being earned on top of returns already made, which can have an enormous impact over time.
If you want to save for your child, you can pay up to £3,600 a year into a Junior SIPP on behalf of your child in the 2022/23 tax year (of which you’ll contribute £2,880 and the government £720 in tax relief), and you have until the end of the tax year on 5 April to use this annual allowance. You don’t have to pay in this full amount and many providers will let you contribute, for example, as little as £25 a month. Find out more in our article Should I pay into a pension for my child or grandchild?
This could provide your child with a valuable head start when it comes to retirement planning, enabling them to focus on other more immediate financial pressures, such as saving towards a property deposit, or covering childcare costs.
If your spouse isn’t currently earning, and if you can afford to, you can again make pension contributions of up to £3,600 each tax year on their behalf. You or they only have to pay in £2,880 and the State will top this up by £720. Find out more in our guide Can my husband or wife pay into my pension?
5. Could you make use of Bed and SIPP?
You may have heard of Bed and ISA, but have you heard of Bed and SIPP? This is a similar process that enables you to top up your pension with investments such as funds or shares that you already hold outside a pension. The transfer process is known as ‘to bed’, hence the name ‘Bed and SIPP’. It involves you selling investments you already hold and then re-purchasing them within a pension wrapper. Beware, though, that the value of any investments added to your pension this way counts towards your annual allowance (see above). Ensure that you factor in your contributions out of income, too, so that you don’t breach your allowance.
There are several potential benefits to Bed and SIPP. You’ll benefit from tax relief on any investments you move into your SIPP, provided you have unused annual allowance. You’ll also be able to benefit from tax-free investment growth within your SIPP. Remember, though, that you will need to sell your investments to move them into the SIPP, and this could trigger a Capital Gains Tax (CGT) liability. This is the tax you pay on any profits above your tax–free annual CGT allowance, which is £12,300 in 2022/23, falling to £6,000 in 2023/24. Read more in our guide What is Capital Gains Tax and how do I pay it? You will also be out of the market for a time, and may miss out on investment growth during this period.
Ian Millward, from Candid Financial Advice, said: “Moving investments from your trading account to an ISA via Bed and ISA means that you gain tax benefits but lose nothing in terms of accessibility. Bear in mind that using the same process to make a pension contribution usually requires more thought, as you lose access until age 55 (rising to 57 in 2028) and generally pensions are more likely to be subject to future rule changes than ISAs.
“That said, with CGT allowances set to halve and halve again in the next few years, holding larger amounts outside of an ISA suddenly got a whole lot harder so it is worth considering Bed and SIPP, but really on a case by case basis.”
Bear in mind too that when you withdraw money from your SIPP, you can only take 25% of your pot tax-free. Learn more about this in our guide How much tax will I pay when I withdraw my pension? Access to your investments will also be restricted when moved into a pension, as you won’t be able to make any withdrawals until you reach the age of 55 (rising to 57 by 2028), and although any growth is tax-free, you can only take 25% of your pension fund tax-free, with the rest taxed as income.
Where to get further help
Pensions can seem complicated, and it can be hard to know if you’re making the most of your retirement savings, or whether you could be doing more.
You may want to consider professional financial advice to ensure your pension is working as hard as possible for you. If you are looking for pension advice from a financial advisor†, word of mouth is always helpful. It’s worth asking trusted friends and family who they have chosen to advise them on their money and if they would recommend using them.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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