Personal pensions and retirement planning
Personal pensions remain one of the most powerful and tax-efficient long-term savings vehicles available. The combination of income tax relief on contributions, tax-free growth within the pension fund, and the ability to take a tax-free lump sum on retirement means that pension saving should be considered carefully as part of any year-end tax planning exercise.
In an environment of rising taxes and frozen income tax thresholds, pension contributions can play a crucial role in reducing current tax liabilities while also helping to secure financial independence in retirement.
Tax relief on pension contributions
Contributions to registered pension schemes made within the annual allowance (AA) attract tax relief at the individual’s marginal rate of income tax. This means:
- Basic rate taxpayers receive relief at 20%
- Higher rate taxpayers receive relief at 40%
- Additional (top) rate taxpayers receive relief at 45%
Relief is normally given by adding basic rate tax relief directly into the pension scheme, with any higher or additional rate relief claimed through Self-Assessment.
The result is that pension contributions can be significantly cheaper than they appear at first glance. For example, a £10,000 gross pension contribution costs a higher rate taxpayer only £6,000 after tax relief, and a top rate taxpayer only £5,500.
The annual allowance and tapering
For most individuals, the standard annual allowance is £60,000. This is the maximum total amount of pension contributions that can be made in a tax year (by you and any employer) while still attracting tax relief.
However, for higher earners, the annual allowance may be tapered.
Tapered annual allowance
If your adjusted income exceeds £260,000, your annual allowance is usually reduced by:
- £1 for every £2 of adjusted income above £260,000
This taper continues until the annual allowance reaches a minimum of £10,000, which applies once adjusted income exceeds £360,000.
Where pension contributions exceed the available annual allowance, the excess does not qualify for tax relief and is subject to an annual allowance charge, effectively clawing back the relief.
Because the definitions of “adjusted income” and “threshold income” are complex and include employer pension contributions, individuals affected by tapering should take advice before making significant contributions.
Carry forward of unused annual allowance
One of the most valuable pension planning tools is the ability to carry forward unused annual allowance.
If you have not used your full annual allowance in any of the previous three tax years, the unused amount can be carried forward and added to your allowance for 2025/26. Contributions made using carried-forward allowance will still attract full tax relief, provided you have sufficient pensionable income, also known as net relevant earnings.
This means that, in some cases, it may be possible to make very large pension contributions in a single tax year, particularly following a period of lower contributions or career breaks.
Pension contributions and income thresholds
Pension contributions are especially tax-efficient where income falls within certain key bands.
Income between £100,000 and £125,140
For UK taxpayers, income in this range is subject to an effective 60% marginal tax rate, due to the withdrawal of the Personal Allowance.
Making pension contributions that reduce income within this band can therefore generate tax relief at 60%, making pensions one of the most effective planning tools available. The position differs in Scotland and where the income being relieved is dividend income, but the principle remains the same: pension contributions can significantly reduce very high marginal tax rates.
Accessing pension benefits
For those approaching retirement, or already considering drawing pension benefits, it is essential to take advice from a properly authorised financial adviser. The decisions made at this stage can have long-lasting tax and financial consequences.
Flexible access to pensions
Individuals aged 55 or over (rising to 57 from 6 April 2028) can usually access their pension funds flexibly. There is no restriction on the amount that can be withdrawn, but:
- Only part of the fund can normally be taken tax-free
- Amounts withdrawn above the permitted tax-free lump sum are taxed as income at the individual’s marginal rate in the year of withdrawal
Large or poorly timed withdrawals can therefore result in unexpectedly high tax bills and may also affect entitlement to allowances or benefits.
Year-end pension contribution planning
As the tax year end approaches, it is often worth reviewing whether additional pension contributions should be made.
Making extra contributions before 5 April
If you are a higher or additional rate taxpayer, making pension contributions before the end of the tax year can secure relief at 40% or 45%, provided you do not exceed your available annual allowance.
This can be particularly attractive where:
- Income has been higher than expected during the year
- A bonus has been received
- You are close to breaching a higher tax threshold
Care must be taken to ensure that contributions remain within the available allowance once tapering and carry forward are taken into account.
Expiring carry-forward allowance
Unused annual allowance from earlier years expires after three years, so it is important not to overlook older allowances.
In particular, unused allowance from the 2022/23 tax year will expire on 5 April 2026 if not used.
Key points to note:
- The annual allowance in 2022/23 was £40,000, not £60,000
- Tapering in that year began at an adjusted net income of £240,000, not £260,000
Failing to use this allowance before it expires could mean losing the opportunity for valuable tax relief.
Pension contributions for spouses and children
Pension planning is not limited to your own retirement savings.
Where a spouse, civil partner or child has little or no earnings, it is still possible to make pension contributions on their behalf.
- Contributions of up to £2,880 per year can be made
- HMRC will add basic rate tax relief of £720
- This results in a gross pension contribution of £3,600
This can be an effective way to build pension savings for non-earning family members, particularly where one partner has a much higher income than the other.
The pensions tax-free lump sum allowance
Although the lifetime allowance (LTA) has now been abolished, this does not mean that all pension benefits can be taken tax-free.
The tax-free lump sum allowance remains capped at £268,275, which represents 25% of the former lifetime allowance of £1,073,100, unless the individual holds a higher level of protection that was put in place when the LTA was previously reduced.
Amounts taken above this limit will be taxable, even though there is no longer a separate lifetime allowance charge.
Planning following the abolition of the LTA
For individuals with large pension pots, the abolition of the LTA charge may significantly change retirement planning.
In particular, it may affect:
- The timing of retirement, as there is no longer a penalty for continued pension growth above the old LTA
- The level of pension contributions made in the years leading up to retirement
While the removal of the LTA charge has simplified some aspects of pension planning, the overall system remains complex, particularly given forthcoming changes to the inheritance tax treatment of pensions from April 2027.
Final thoughts
Pensions continue to offer some of the most generous tax reliefs available in the UK tax system. When used effectively, they can reduce income tax liabilities, mitigate exposure to high marginal rates, and provide long-term financial security.
However, the rules around annual allowances, tapering, carry forward and benefit access are intricate, and mistakes can be costly. Pension planning should therefore form an integral part of your year-end tax review and should always be undertaken with appropriate professional advice to ensure that contributions and withdrawals are structured in the most tax-efficient way possible.
