Consider paying more into your pension plan
Updated 21 June 2016
It can make sense to pay as much as you can afford into your pension plan even in the year that you plan to retire. This can be particularly worthwhile if you’re currently a higher rate taxpayer but expect to be a basic rate taxpayer in retirement.
You see, you’ll normally receive tax relief on your pension contribution at the higher rate of tax, but may only pay tax on your retirement income at the basic rate.
How much can I pay?
Provided you've not reached the age of 75, you can obtain tax relief on any contributions you pay (or are paid on your behalf, other than by your employer) in any tax year provided they’re not higher than the greater of:
- 100% of your Relevant UK Earnings i.e. broadly employment income or your earnings from a trade or profession, and
An annual allowance also applies to the total amount of pension contributions (including any employer contributions) that are paid in a tax year. The annual allowance for 2016/17 is £40,000 unless you're a higher earner or are subject to the money purchase annual allowance (MPAA). The MPAA applies to individuals who have flexibly accessed their pension benefits on or after 6 April 2015. Find out more about the annual allowance or if the MPAA applies to you.
When deciding on how much to pay into your pension you should also be aware of the lifetime allowance. This is the maximum amount of tax privilaged pension benefits you can receive during your lifetime from all registered pension schemes. The standard lifetime allowance is £1million for 2016/17, unless you have a form of lifetime allowance protection that increases your allowance. While most people are unlikely to be affected by this, you should seek professional advice if you feel you may be caught by this.
And don’t forget...
Increasingly, people are choosing other products to save for their retirement and you could consider these as well.
ISAs are another way to save for your retirement. You won’t receive tax relief on your contribution, but you can take an withdrawal without paying tax and you can withdraw how much you like when you like. Find out more about the Retiready ISA.
Note: This content is general high level information only and should not be interpreted as individual advice. Because the circumstances of each reader will be different and not known to us we recommend that tailored advice from an expert is sought.
The value of an investment can fall as well as rise and is not guaranteed. You may get back less than the amount originally invested. The value of any tax relief depends on the individual circumstances of the investor.