Private pensions

state pension fund

Private pensions

Contributions within the annual allowance (AA) to pension funds attract relief at your marginal rate of tax. The combination of tax relief on contributions, tax-free growth within the fund and the ability to take a tax free lump sum on retirement makes a pension plan an attractive savings vehicle. Saving for retirement should always be considered as part of the year-end tax planning process. This is particularly important for those with an annual adjusted income in excess of £260,000. Since the AA of £60,000 (pre-6 April 2023: £40,000) is usually tapered by £1 for every £2 of income in excess of £260,000 (pre-6 April 2023: £240,000). Reducing to a minimum of £10,000 for those with income over £360,000. These last two figures were respectively £4,000 and £312,000 pre-6 April 2023. No tax relief is available for contributions exceeding the available AA. The AA can be carried forward for three tax years to the extent it is unused. Any unused AA for the three previous years can be added to your allowance for 2023/24 and will attract full relief, subject to the level of your pensionable income (‘net relevant earnings’). If you are approaching retirement and are considering drawing benefits, take advice from a properly authorised advisor, to ensure that you understand the tax and other implications of accessing your pension fund. nal Minimum Pension Age (NMPA) is currently 55. Those aged 55 or over can access their pension fund flexibly, with no restrictions on the amount they can withdraw. Although amounts drawn above the permitted tax-free lump sum will be taxed as income as they are drawn.

Planning points

• Consider making additional contributions to your pension scheme before the end of the tax year to obtain relief at 40% or 45%. Depending on whether you are a higher rate or top rate taxpayer, taking care not to breach your available AA.
• Contributions are particularly tax-efficient where your income is between £100,000 and £125,140. Tax relief is available at 60% on income falling within this bracket. The relief is different in Scotland and where the income being relieved is dividend income.

• Review the availability of any unused allowance for the 2020/21 tax year, as this will expire on 5 April 2024.
• Consider making contributions of up to £2,880 to a pension scheme for a spouse or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions. For example, if you contribute £2,880, HMRC will pay in £720, giving a gross contribution of £3,600.
• If you make pension contributions after taking more than the tax-free lump sum when flexibly accessing your pension savings. You will normally have a reduced AA for further contributions of £10,000. Make sure that you keep contributions below this level to avoid a charge.
• Unfortunately, pensions scams are very common. They can result in the loss of all or part of your pension pot. A penalty tax charge from HMRC, or both. Before committing to any changes to your pension fund, it is vital to take proper advice.

More from the newsletter can be found here