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How to get the most from your pension before the tax year ends

Written by: Sarah Lord
A number of changes to the pension system are on the way and even more radical reforms could be on the cards. Sarah Lord, managing director of Killik Chartered Financial Planners, explains what you should do now to get the most out of your pension.
  • Take advantage of tax relief on pension contributions

George Osborne may potentially alter or indeed remove tax relief on pension’s contributions in the upcoming Budget, and replace it with a system where everybody qualifies for the same base rate of relief, regardless of earnings.  Whilst it’s not yet set in stone, it is worth maximising your contribution before 16 March this year (Budget day).

  • Pay into a pension even if you do not have any earnings

Currently, you can invest £2,880 even if you have little or no earnings and qualify for basic rate tax relief of £720 boosting your investment to £3,600. Given the likely changes to pension tax relief, it is quite possible that this could be removed for the future so make use of it now while you still can – and think about non-earning spouses or children who could benefit.

  • Use up one-off additional increased pension allowance

In the Summer Budget, Osborne announced a one-off opportunity to pay more into your pension before 5 April. Even if you contributed the £40,000 maximum before the Budget in July, you can still add a further £40,000 before the end of this tax year. This is a one-off opportunity to benefit from an increased annual allowance and, for those earning more than £150,000 a year, it may be the last chance to maximise tax-relief on pension contributions before reduced allowances kick in.

  • Carry forward any unused pension allowances from the last three years

If you haven’t maximised your pension savings in previous tax years, you still have time. In addition to this year’s annual allowance, it could be possible to add an additional £140,000 by making use of any unused annual allowance from the previous three years through ‘carry forward’. Just make sure that your earnings in the current tax year are at least equal to the total contributions being paid.

  • Watch out for the reduced annual allowance for high earners

Those earning more than £150,000 will have the amount they can pay into their pension limited in the new tax year. For every £2 of income you earn over £150,000, your annual allowance will be reduced by £1. The maximum reduction will be £30,000, so anyone with a net income of £210,000 or more will only be entitled to an annual allowance of £10,000. As a result, high earners affected by this change may have to reduce their contributions or suffer an annual allowance charge. It is also important to look at any bonuses or additional payments you might receive throughout the year, in order to correctly calculate your entitlement.

  • Make the most of your lifetime allowance (LTA)

The amount that can be saved tax free in a pension is being reduced to £1million from £1.25m in the new tax year meaning that more people than ever will be subject to an LTA charge of up to 55% on lump sum withdrawals above this threshold. With this in mind, you need to assess whether you’re better off applying for fixed or individual LTA protection going forward.
You can’t apply for fixed protection until July but it is important that there are no further pension contributions beyond 5 April.  Many people are likely to be caught by the lifetime allowance reduction – particularly if they remain an ‘active member’ in a company pension scheme.

Do the sums on whether it makes more sense to remain in the pension and keep receiving employer contributions or whether to opt out and secure fixed protection.

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