Your pension should form a key part of your wealth planning strategy as it is one of the most tax-efficient ways to save for retirement. Therefore, making the most of your contributions should be high on the list of considerations.
Here are some of our top tips to get the most from your pension
Contributing to your pension
Pension contributions are subject to the ‘annual allowance’, the upper limit of a contribution on which you can receive tax relief in any given tax year. Contributions can be paid by you, your employer or by a third party on your behalf.
To receive tax relief on your pension contribution you can make a gross contribution of up to £60,000 from the 2023/24 tax year or 100% of UK relevant income*, whichever is higher. Non-earners can also make contributions of up to £3,600 gross each tax year.
You can contribute more than the annual allowance; however, you would be unable to receive tax relief on the excess.
Making use of any unused annual allowance
In addition to your annual allowance, you may also have entitlement to carry forward allowances, allowing you to bring forward any unused annual allowances from the previous three tax years assuming you have the earnings to do so, and if you have fully exhausted this year’s annual allowance. Carry forward rules can be complex, and it is important to take advice before making any contributions above the annual allowance.
Let’s see how carry forward can work for you:
Linda has earnings of £100,000. She has fully exhausted her current year’s annual allowance making a gross contribution of £60,000 to her pension. In addition, she has unused annual allowances as follows:
| Tax year | Unused allowance |
| 2020/21 tax year | £20,000 |
| 2021/22 tax year | £20,000 |
| 2022/23 tax year | £10,000 |
In total, she has £50,000 unused allowance. Given her earnings, in this tax year she can carry forward £20,000 from 2020/21 and £20,000 from 2021/22 making a total contribution of £100,000 (her annual earnings). This leaves the unused allowance of £10,000 from 2022/23 to be carried forward to next tax year.
*Relevant income includes employment income (wages, overtime, bonus, commission), income derived from carrying out a trade, profession or vocation, patent income, general earnings from overseas Crown employment. Note that rental income is generally not included in relevant earnings.
Claiming higher/additional rate relief on your pension contributions
If you are a higher or additional rate taxpayer and are making personal pension contributions, you may be entitled to claim higher/additional rate tax relief on the contributions you have made in the tax year.
The most straightforward way to claim this is by submitting a self-assessment tax return, which will show the total gross contributions you have made within the tax year. However, for those that do not already submit a tax return, there are other ways to claim. You can do so by calling or writing to HMRC, who will provide you with next steps.
Using your pension as part of your investment strategy
Most pension funds will automatically enrol you in a default investment strategy and while this might work for you now, it’s worth considering long term suitability.
The first point to consider is your attitude to risk and the risk profile of your current strategy. You may be in a lower or higher risk strategy than you might feel comfortable with.
You should also consider the investment performance; while past performance is not an indicator of future performance, it can be a helpful guide as to the reliability of the fund. It can also indicate if performance has been overly eroded by fees.
Finally, you also want to consider your timeline to retirement. The higher risk the fund, typically this means the higher the potential for growth but also the higher the level of volatility. However, if you have 30 years before you access the fund, you may feel you have sufficient time to sit tight during those periods of volatility. Conversely, if you plan on retiring in the near future, you may consider reducing your investment risk.
Protect your pension if the worst were to happen
Ensuring you have up to date nominations provided stating who you would like your pension to go to in the event of your passing is very important. While pensions are typically free from inheritance tax, if there is no clear indication of who should inherit your pension upon your passing, the trustees of the pension scheme may elect to put your pension back into your estate, thereby bringing it back into any inheritance tax calculations.
Up to date nominations also provide an opportunity for you to express who you wish to benefit from your pension in the event of your passing, and with what proportion of the pension fund.
Retiring soon, consider all your drawdown options
In 2015, new legislation was introduced that made the way you can access your pension more flexible than ever before. However, there are a number of older schemes that do not have the provision built in to enable this flexibility. If you are considering retirement in the coming year, it is worth considering what your retirement options are with your current provision, and whether you have full pension flexibilities (including flexi-access drawdown).
Passing your pension on to the next generation
Given the inheritance tax benefits of pensions, many see a pension as an opportunity to pass on a legacy to their families, rather than as a source of income in retirement. Much like retirement options, there are some pension schemes which offer a limited number of options for what your beneficiary/beneficiaries may be able to do with the fund in the event of your passing. This can be very limiting but also result in your beneficiaries paying unnecessary tax on the fund. As such, it is worth understanding what death benefit options are available within your pensions and if these provide the flexibility to give your beneficiaries freedom to choose how they take the benefits should you pass away.
Connect with us
Your pension will fund most if not all of your retirement so it’s important that you get as much as you can from it, in the most tax-efficient way. If you would like to review your pension strategy, please get in touch and we would be delighted to have a free 30-minute chat.
