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Top up your pensions before the end of the tax year

Everyone has a dream retirement in mind, so when the time comes to make that dream a reality, you must be able to draw from your pension fund in the most tax efficient way.

From 6 April 2024, how you draw from your pension fund will change. To support you through these changes, we have outlined some steps you can take ahead of the 5 April 2024 and others you need to be aware of to make sure you get the most from your pension pot.

Pensions Annual Allowance  

The Annual Allowance is the limit on how much you can build in tax-efficient pension benefits each year and for most, this is £60,000 (2023/24 tax year).

It is possible to build additional pension benefits using Carry Forward rules. These rules allow you to make use of any unused Annual Allowance from the three previous years, including both personal and employer contributions.

To take advantage of Carry Forward rules, you must have been a member of a pension scheme during the tax year that you intend to use the allowance from. The standard Annual Allowance in the previous three tax years was £40,000.

Tip: If you’re unable to contribute to your pension in this tax year but want to save towards your retirement, think of setting up a pension scheme now (before the end of the tax year), even with a small amount such as £100.

Even with a modest amount, becoming a member of a pension scheme will allow you to use carry forward allowance in future tax years. A contribution of £100 this year means that in the next tax year 2024/25 you could have a £40,600 allowance for that year plus a carry forward allowance from 2023/24 of £59,900.

This is particularly useful for the self-employed, but a lot of senior employees/directors still do not have any form of pension provision and have even opted out of auto-enrolment schemes. Membership in such a scheme would qualify as a registered scheme and open the Carry Forward options for later years.

If you exceed your Annual Allowance, the excess will be taxed at your marginal rate of income tax. For example, if you are a 45% taxpayer, your Annual Allowance Tax Charge will be at a rate of 45%. This is where planning is important so that you do not unnecessarily exceed your allowances.

If you need support, please do not hesitate to connect with us.

Tapered Annual Allowance

Your Annual Allowance in 2023/24 is tapered if your Adjusted Income in 2023/24 if your income exceeds £260,000, you will lose £1 of your allowance for every £2 of Adjusted Income above £260,000. The minimum annual allowance is £10,000 for the 2023/24 tax year, which is reached when your Adjusted Income exceeds £360,000.

The rules around the Annual Allowance and Tapered Annual Allowance have changed multiple times since they were first introduced, and you need to be aware of what the rules were on annual limits for each tax year you are looking to carry forward any unused allowance from.

It is a complicated area, and we would encourage anyone looking to carry forward unused allowances to take proper advice.

Flexible pensions

Up to 25% of a pension fund can normally be taken as tax-free cash, however, if you don’t need it upfront, you can often draw it in stages. This is known as ‘phasing’ to give more tax-free ‘income’ each year, blending it with taxable income to use allowances effectively.

Of course, it’s possible to just take tax-free cash to meet expenditure needs in the early years, for example, paying off your mortgage when you retire. However, it’s important to consider not just what results in the least amount of tax today, but the impact on tax due in the future.

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With pension legislation changing from 6 April, planning ahead is important, please do not hesitate to get in touch with us if you need any help.

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