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 paying higher rate tax but expect to pay basic rate tax in retirement.
You see, you’ll receive tax relief at the higher rate paid on your contribution but only pay tax on income you receive in retirement at the basic rate. Of course, you’ll also qualify for a tax free lump sum on any additional contribution.
How much can I pay?
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 your earnings from a trade or profession, and
There is a limit (annual allowance) on the maximum amount of pension savings that can be paid in a year without incurring a tax charge. For the tax year 2016/17, the annual allowance is £40,000.
For anyone with an income of more than £150,000 (including pension contributions, property rental income and investment income) the annual allowance is reduced by £1 for every £2 above £150,000. There is a minimum annual allowance of £10,000 for people with income (including pension contributions) of more than £210,000.
Where you have not fully used up your annual allowance in the three tax years before the current tax year, you can also carry forward the unused amount to effectively increase your annual allowance for the current tax year.
There is also a limit on the value of tax relieved pension benefits you can receive during your lifetime. For the tax year 2016/17, this limit is £1m. 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. For example, ISAs are a popular method. You won’t receive tax relief on your contribution, but you can take an income without paying tax and you can withdraw how much you like when you like.
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.
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.