Every new tax year presents an opportunity to review your pension savings strategy, which can set a solid foundation for your future financial stability. Whilst some people delay taking action until the end of the tax year, timely attention to your private pension earlier in the fiscal year not only cultivates beneficial saving habits; it also ensures that you fully exploit the benefits and allowances available to you and gives your investments more time to grow. The power of compound growth can significantly bolster your pension pot and, by extension, your retirement prospects.

Maximising your annual allowance

The pension annual allowance (AA) represents the maximum sum that you, your employer, and any external parties can contribute to all of your pension schemes within a tax year without triggering a tax charge. Currently the cap is set at £60,000 or 100% of your annual earnings, depending on which is lower.

For those without earnings, the maximum tax relievable contribution is £3,600 gross, and for individuals who have commenced withdrawals from their pension funds, they might face the Money Purchase Annual Allowance (MPAA), lowering their allowance to £10,000.

If your financial situation permits, maximising your pension contributions early in the tax year enables you to fully utilise the AA and potentially reduce your tax liability if your earnings are equal to the AA or more.

NB - the pensions carry forward rules currently allow any unused AA to be utilised for a maximum of three tax years – therefore 5th April 2025 will be the last opportunity to use any available allowance from the 2021/22 tax year.

Securing extra savings through tax relief

Tax relief provides a compelling incentive to save into your pension, making pension plans amongst the most tax-efficient vehicles for retirement savings. For the majority of UK taxpayers, tax relief equates to a Government top-up of 20% on pension contributions, effectively reducing the cost of a £100 addition to your pension to just £80 from your pocket.

Higher and additional rate taxpayers may be entitled to further relief, though claims beyond the basic rate require a self-assessment tax return. It’s worth noting that some workplace pensions may apply tax relief differently, such as through salary sacrifice schemes, so it’s advisable to verify the specifics with your employer.

Leveraging workplace pension schemes

Workplace pension schemes significantly enhance your ability to save for retirement, with compulsory contributions from both you and your employer. A minimum total contribution of 8% of your qualifying earnings is required, including at least a 3% contribution from your employer.

Many employers are willing to match your contributions up to a certain level, potentially doubling the investment in your retirement fund. Investigating whether increasing your contributions could lead to higher employer contributions is an astute strategy for maximising your pension growth.

Using bonus sacrifice for pension enhancement

Employees who receive work bonuses have the opportunity to allocate a portion or the entirety of these bonuses directly into their pension schemes.

Some employers may be willing to match your contributions up to a certain level, potentially doubling the investment in your retirement fund. Investigating whether increasing your contributions could lead to higher employer contributions is an astute strategy for maximising your pension growth.

Optimising your tax-free Personal Allowance

The tax-free Personal Allowance for the 2024-25 tax year is £12,570. However, this allowance decreases by £1 for every £2 of income above £100,000, ultimately disappearing once income surpasses £125,140.

By strategically contributing to your pension, higher earners can lower their taxable income and potentially reclaim any lost Personal Allowance. This results in receiving tax relief at an effective marginal rate of 60%, a significant advantage for pension contributions.

Securing Child Benefit through pension contributions

Adjustments announced in the March 2024 Spring Budget impacted the High-Income Child Benefit Charge threshold, which was raised to £60,000 from 6th April 2024. The complete cancellation threshold also increased to £80,000, meaning fewer families will find their Child Benefit reduced or nullified.

Enhancing pension contributions can effectively diminish taxable income for those with earnings within these brackets, thereby retaining Child Benefit entitlements. Even for earners above £60,000, applying for Child Benefit to accrue National Insurance credits remains beneficial, which is vital for the State Pension.

Time to explore how to enhance your pension?

Navigating the complexities of pension contributions and tax benefits can be confusing. Always seek advice if you need further clarification or wish to explore more personalised financial strategies to enhance your pension. The correct support and guidance can help you to achieve a secure and prosperous retirement.

Reviewing your financial plans on a regular basis can help you to make best use of the tax-efficient investment strategies available and ensure that you do not pay more in taxes than is necessary.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Reducing earnings via salary sacrifice can impact entitlement to income related employer and Government benefits and may not be appropriate for some individuals.

Depending on how you access your pension, your annual allowance will be reduced to £10,000. This is known as the Money Purchase Allowance (MPAA).

FP2024-265 – Last review June 2024