Tax

Pension schemes are the most efficient form of investment as contributions into the scheme benefit from tax relief, which offers a huge advantage over any other form of savings plan. In addition, when the time comes to receive your pension, you can usually take a portion of it in the form of a tax-free lump sum.

Annual Allowance and Lifetime Allowance

Although you are free to pay up to 100% of your wages or salary into your pension scheme, or schemes, an ‘Annual Allowance’ limits the amount of tax relief you can claim each year. In addition, a ‘Lifetime Allowance’ prescribes a limit on the total value of your pension pots before which you start to pay additional tax.

• Annual allowance
  An ‘annual allowance’ of £40,000 per year^* is the maximum you can pay into your pension schemes each year and receive tax relief against. The figure is defined differently depending on the type of pension scheme you have. If it’s a defined contribution scheme, it’s the total amount you, your employer or anyone else can contribute each year. If it’s defined benefit scheme, it’s the total that can accrue each year. If you have both defined contribution and defined benefit schemes then it’s a combination of the two.

  You won’t receive tax relief on any contributions that exceed your annual allowance and you’ll also have to pay an annual allowance charge.

  ^*Tax year 2015-16

• Lifetime allowance
  The lifetime allowance prescribes a limit to the total value of your pension pots before you have to pay an additional tax. Introduced in 2006, the lifetime allowance was originally set at £1.5 million, is currently £1.25 million and will fall to £1.0 million from 6 April 2016.

  Although this may seem a lot, saving into a pension scheme is normally a long-term commitment so, if you’ve been contributing for many years, especially if you’re a high earner, reaching the lifetime allowance could be relatively easy. In fact, a protection scheme was introduced to protect those whose pension benefit exceeded the lifetime allowance, allowing them to protect the benefit they had accrued from tax charges.

  If the value of all your pension pots exceed the lifetime allowance, any excess is taxed at 25% if it is withdrawn as income or 55% if it is withdrawn as a cash lump sum.

Tax relief on contributions

Tax relief, on both your and your employer’s contributions, is added to your pension pot which increases its value.

You receive tax relief at the highest rate of income tax you pay on any contributions you make to your pension scheme(s) providing that your total gross contribution doesn’t exceed your annual earnings or your annual or lifetime allowances. How you receive tax relief, and how much you receive, depends on your income, the pension scheme you are contributing to and how your pension contributions are made.

If you are a basic-rate taxpayer you automatically get 20% tax relief from the government and this is paid into your pension pot by your pension scheme provider. If you are a higher-rate tax payer you can claim an additional 20% tax relief from HMRC through your self-assessment tax return and if you pay tax at the top rate you can claim a further 25% tax relief from HMRC.

Tax relief is calculated on a ‘pre-tax’ basis, ie: on the amount you earned, not the amount you contributed. If you are a basic rate taxpayer and make a contribution of £100, the pre-tax amount would have been £125, ie: £125 less 20% tax (£25) is £100. So, in this example, your pension pot would receive £25 credited as tax relief, increasing your contribution to £125.

If you’ve your own private pension scheme your contributions are usually treated as being paid net of basic rate income tax relief and, like workplace pension schemes, your pension provider will claim back basic rate tax at 20% and add this to you pension pot.

Tax on pension income

Any income you receive from a pension scheme, including your State Pension, is treated as earned income and may be liable to tax, your pension provider(s) using your tax code to deduct tax before paying the balance to you.

You should be able to take a proportion of your pension pot as a tax-free lump sum. This may be the first 25% in the form of a pension commencement lump sum (usually referred to as a ‘PCLS’) or, if you go for an uncrystallised fund pension lump sum (‘UFPLS’) income drawdown arrangement (whew!), take smaller cash sums as and when you need them, the first 25% of each being tax free.

You need to think about any potential tax implications before you receive your pension as your income strategy during your retirement will dictate what you do with your pension pot and how you receive your pension.

You don’t pay National Insurance contributions on your pension income.

How can One Financial Solutions help you?

One Financial Solutions is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.

We’ll assess the value of your State Pension and make sure you receive everything you’re entitled to. We’ll review any workplace and private pensions you may have and recommend any changes we feel are beneficial. If you need a pension scheme we’ll find one for you and, as a truly independent firm of financial advisers, we’ll select one from the entire market and make sure it’s the best one for you.

So, if you’re looking for specific help about any aspect of your pension or just want advice on the subject, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.