Top 10 pensions tax saving tips

The top 10 tips below provide information on important considerations that individuals should be making.

1.Tax relief

Remember that pension contributions qualify for tax relief at your marginal rate of income tax up to an annual allowance of £50,000. With tax relief of up to 50% available, this makes pension contributions a very tax-efficient investment.

2.Maximise pension contributions

If you are a high earner with an annual income in excess of £150,000 and paying income tax at 50%, you should consider whether to maximise your pension contributions before the 50% tax rate is removed.

George Osborne confirmed in the 2012 Budget that the 50p income tax band will be scrapped in April 2013. With higher-rate tax relief under threat individuals may consider bringing forward any planned contributions (subject to annual allowance) or utilise carry forward rules (see tip five for further details).

3.Maximise family's pension contributions

If you have maximised your own pension contributions, you should consider making a contribution to your partner's pension. Even if your partner does not pay tax, contributions up to £3,600 gross will still qualify for tax relief at the basic rate.

You may even want to consider making a pension contribution to the pension of a child or grandchild - contributions up to £3,600 each tax year qualify for basic rate tax relief. There is therefore the potential to benefit by up to £720.

4.Inheritance tax exemption

If you are making a pension contribution for a child or spouse, these may qualify for an inheritance tax exemption. This may help you from an estate planning perspective.

5.Carry forward

If you are looking to contribute more than £50,000 per tax year to your pension, you should consider whether you can take

advantage of the carry forward rules that will allow unused contribution allowances to be carried forward for up to three years.

This may allow you to contribute up to £200,000 to your pension in the 2012/13 tax year. Remember, individuals only have a few weeks to use any unused annual allowance from the 2008/09 tax year.

6.Plan ahead

If you want to take advantage of the new carry forward rules, you need to ensure you have your pension in place before the end of this tax year. You cannot carry forward your unused allowance if you did not have a pension in place prior to the start of the tax year.

7.Effective rates

If you have an income between £100,000 and £114,950, you can get tax relief on pension contributions at an effective rate of up to 60%. Not only would you get tax relief at 40%, you would also claw back your personal allowance which would add up to an additional 20% to the relief.

8.Avoid paying CGT

Remember that once cash is contributed into a pension there is no capital gains tax to pay on any gains.

9.Pension protection

You can normally take up to 25% of your pension fund as a tax-free lump sum from age 55 (subject to the Lifetime Allowance).

The Lifetime Allowance was reduced to £1.5 million on 6 April 2012.

If you think you will be impacted by the reduction you may be able to apply to HMRC for protection if you or your employer are no longer saving into a pension for you. This is known as fixed protection. HMRC must receive applications for fixed protection no later than 5 April 2012.

10. Flexible drawdown

Flexible drawdown allows individuals with at least £20,000 of secure pension income to withdraw unlimited income from any other pensions they have.

If you want to take advantage of flexible drawdown you will not be able to make a pension contribution in the tax year in which you move into flexible drawdown or in any subsequent year (without a tax charge applying). You may therefore only have a few days left to make any final pension contributions.

Steve Latto is head of pensions at Alliance Trust Savings

This feature was written for our sister website Money Observer

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