Pension Funding - What Are My Options?

Rob Wood, one of Scrutton Bland’s Technical Paraplanners, explains some of the things you need to know about how the Annual Allowance can affect your retirement savings plans.

Recent financial news items have emphasised that saving for retirement should be at the front of everyone’s minds. There are numerous ways in which individuals can save towards their retirement, the main option being personal pension saving. 

Many people will have heard the words ‘auto enrolment’, or will be involved in an employer’s pension scheme in some way, but possibly not so many keep track of what they can contribute to their retirement savings? As ever, it’s not just as simple as putting money in now and withdrawing it later. 

Firstly, there is good news for savers. You are able to obtain tax relief when adding to your pension via contributions in any given tax year, but of course there is an overall limit, which is known as the Annual Allowance. Typically the Annual Allowance is set at £40,000 or your earnings for the tax year, whichever is the lower. So if you earn anywhere between £3,600 and £40,000 your Annual Allowance will be equal to the sum earned. If you earn below £3,600 you can still contribute up to £3,600 and gain tax relief.

To many people this is a positive thing, as it means they can invest a sum equal to their earnings for the year into a pension and still qualify for tax relief, which further increases the value of their pension. 

But what if you have a higher level of earnings? In this case there are restrictions on the tax relief available.  If you have a threshold income of £110,000 or more, you may find that the amount you can put into a pension is reduced, or ‘tapered’ down based on the amount you earn. This gets to a point where if you earn in excess of £210,000 you could be left with an annual allowance of only £10,000. 

The thing to remember is that there is no actual limit on what can be added to a pension, as the restriction only applies to the level of contribution that receives tax relief. 

If your contribution is above your annual allowance, then you will suffer a tax charge which is equal to the tax relief you would have been given.

There is also another restriction on contributions to a pension which is known as the Money Purchase Annual Allowance. This applies to people who may have already accessed their pension rights flexibly through the pension’s freedom legislation, and limits their contributions to £4,000 no matter what they earn.

Saving for your pension is a great route to plan for retirement, but there are rules to follow to ensure you get the most out of your money and savings.

If you have any questions about the Annual Allowance, or planning for your pension then please get in touch with one of our independent financial advisers or specialist Tax Advisers to discuss your goals and options.

Contact Rob Wood at 01206 838400, or for tax advice please contact Graham Doubtfire