All of the following apply just to defined contribution pensions – a pot that you or your employer pay into. Different rules apply if you have a defined benefit pension from work – one that is related to your salary. They do not refer, of course, to the state pension.
Are you overestimating your pension pot?
1: Pay in more
The more you put into your pension, the more you will get out. But there are strict limits on how much you can pay in. Normally you cannot pay in more in a year than you earn. But even if you have no earnings at all, you can put in £2,880 – which with tax relief adds up to £3,600.
The money you pay in does not have to come directly from your earnings. So if you earn £10,000 and have £20,000 in savings, you can pay £10,000 out of your savings into the pension and still get the full tax relief, which will boost the amount in your fund by £12,500.
If you earn from £40,000 to £150,000, the maximum you can pay in – including tax relief – is £40,000. If your earnings plus your pension contributions exceed £150,000, that maximum drops and can be as low as £10,000. That lower limit may also apply if you have already taken money out of your pension fund, though you can in some circumstances take the tax-free lump sum without triggering the lower limit.
You may be able to carry forward allowances you have not used in some past years, but the rules are very complex. There is also a lifetime limit – your pension fund cannot exceed £1 million. Before April 2016, this was higher and there are complicated transitional provisions. Get advice if you are near any of these limits.
Can you treble your pension pot?
2: Share the love
You’re never too young to start a pension. You can even set one up for a grandchild.
You can put in up to £2,880 a year and the Chancellor chips in with tax relief (even though your newborn grandchild does not pay tax) to make it up to £3,600 in the fund.
After that, even if they put nothing more in, after 70 or so years of compound interest your one-year gift alone could make a six-figure sum by the time they reach pension age.
As for investment, keep costs down and ask a good independent financial adviser.
Saving in a pension for grandchildren
3: Claim your tax relief
When you pay into a pension the Treasury automatically pays in tax relief of £25 for each £100 you pay in. So, pay in £5,000 and your fund will have £6,250 in it.
If you are a higher-rate taxpayer, you can get another slice of tax-relief but you have to claim it – usually by filling in a self-assessment form. That will reduce the amount of tax you pay on your other income.
The Government estimates that more than £200 million of this higher-rate tax relief is not claimed. Make sure you get yours!
Is pension tax relief ending?
4: Don’t retire until 75
You can pay into a pension right up to the age of 75. Of course, there is not much time for the fund to grow.
But every £100 you put in from taxed income has £25 added by the Chancellor, and you get extra tax relief if you are a higher-rate taxpayer. Even if your investments do not grow, your fund is already worth a lot more than you put in.
5: Take a tax-free lump sum
Normally you can take a quarter of your pension fund free of tax. But in some cases you can take out more than 25%. It is called protected tax-free cash and can apply to pensions paid through your employer that were begun before April 2006. The rules are complex. Check with your pension provider.
Releasing pension funds at 55
6: Use your pension now
You can take money out of your pension from the age of 55. That is not usually a good idea, but in some circumstances it may be. For example, if you have a big debt, you could consider using some of your pension – perhaps the tax-free lump sum – to pay it off.
Getting rid of an expensive debt will mean you are better off for the rest of your life. You can still leave the rest of your pension invested until you reach the age when you want to retire. Then you may be able to take another tax-free lump sum based on the higher value of your fund since you took the first one.
Dispelling pension myths
7: Get free help
It’s always advisable to get impartial advice when dealing with your pension. Contact pensionwise.gov.uk (0800 138 3944) or pensionsadvisoryservice.org.uk (0300 123 1047)
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