Top 10 pensions tax saving tips
The top 10 tips below provide information on important considerations that individuals should be making.
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 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.
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.
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.
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
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.