Why should you maximise your pension annual allowance?
The average pension savings pot in the UK will last just 7 years, based on what most people believe they need as a retirement income. More people then need to do more to plan for their retirement and pensions remain one of the most effective ways to provide for your future. The annual allowance of £50,000 is the maximum amount of pension contribution in a year on which an individual can receive tax relief. A £50,000 pension contribution for a higher rate taxpayer saves £20,000 in Income Tax.
Can you make pension contributions of over £50,000 this year?
It may be possible to use ‘carry forward’ to make larger contributions now. Those using their allowance for 2012/13 have until 5 April to carry forward unused allowance from 2009/10. If you have used up these allowances yet want to maximise contributions to secure 50% tax relief you should consider accessing the £50,000 allowance for the 2013/14 pension input period. This could be particularly helpful for individuals or companies who had an especially good year.
Are you an additional rate taxpayer?
Although the reduction in the additional rate of Income Tax that applies to income in excess of £150,000 from 50% to 45% is good news, it also means that from 6 April 2013 there is a corresponding reduction in tax relief to 45%.
The 5% reduction in tax relief has the effect of increasing the cost of pension contributions by 10%. A gross contribution of £20,000 currently costs an additional rate taxpayer £10,000 after tax relief, but from 6 April 2013 the net cost will increase to £11,000 – 10% more.
You can save 10% on pension contributions by taking action before 5 April.