Plan today, enjoy tomorrow
Why pensions are so important, and how to find the right option for you.
If 2020 has taught us anything, it’s that you don’t know what is around the corner. And I don’t mean to be all doom and gloom, but none of us is getting any younger either. On the plus side, we are living longer! So, planning for your future is more important than ever if you want peace of mind that you will be comfortable in your later years. And yet, so many of us put it off thinking that we can’t afford to put extra money aside right now. I would suggest that you can’t afford not to. But where do you start and whom do you trust? Here’s the Ten Forward handy guide to understanding pension basics.
The Importance of Pensions
We all know that pensions are crucial for our later life, and, for most of us, it will be our sole income in older age. Setting aside savings to use in later life is helpful, but the reality is that the value of money and the price of living is always changing. What seemed like a reasonable amount to save ten years ago may be completely unrealistic in another ten years’ time. The value of a pension is more regulated, invested and changed, right up until it is withdrawn. This is your best chance of having a good living.
Knowing your pension management options can ensure that you are either managing your pension properly, or overseeing someone who is, and you can ask them to explore certain avenues to your benefit.
Tax Benefits
If you choose to pay the money into your pension yourself, or if it is taken by your employer from your pay, you automatically get 20% tax back from the Government as an additional deposit into your pension pot. If you are a higher-rate taxpayer, you can claim an extra 20%, while top-rate taxpayers can claim an additional 25%. This is another reason why paying into a pension scheme is better for you than relying on savings.
Maximum Contributions
Technically, there’s no limit as to how much you can put in a pension, but there are limits on how much tax relief you’ll get for doing so. There are three different limits to be aware of:
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Earnings Limit
You can get tax relief on your contributions up to your annual earnings. So, if you earnt £25,000, you could put a maximum of £25,000 and get full tax relief. But you wouldn’t receive tax relief on any contributions you make over this amount.
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Annual Limit
The annual limit is £40,000; however, if you are a high earner, you may be affected by the tapered annual allowance, which could bring it down to £4,000. If you contribute more than your allowance, you will receive an annual allowance charge.
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Lifetime Limit
The lifetime allowance has gone up to £1,073,100 for 2020/21. What it means is that if your total pension savings (including gains/interest) are over this amount, you will face a tax charge.
Tapered Annual Allowance
As of April 2016, the Tapered Annual Allowance was introduced for a fairer approach to pensions. It adds a cap on how much you can save.
From April 2020, the threshold and net income to calculate your pension taper have been increased by £90,000. The threshold income, which is normally net income before tax (excluding pension contributions), is increased from £110,000 to £200,000. The adjusted income, which is normally net income plus pension accrual, is increased from £150,000 to £240,000. For every £2 of adjusted income over £200,000 an individual’s annual allowance is reduced by £1. If you earn over £312,000, your allowance is decreased to £4,000. To help you make sense of that, here’s a table with some examples:
| Total Adjustable Income | Annual Allowance |
| £240,000 | £40,000 |
| £250,000 | £35,000 |
| £260,000 | £30,000 |
| £270,000 | £25,000 |
| £280,000 | £20,000 |
| £290,000 | £15,000 |
| £300,000 | £10,000 |
| £312,000 | £4,000 |
Put simply, if you are a high earner, you might find that you can no longer save what you used to in your pension. This is important to be aware of because there are ways you can reduce the impact of the Tapered Annual Allowance – pension experts will know about these, such as the ‘carry forward’.
What’s the Carry Forward?
To ‘carry forward’ on your pension is to maximise the amount you can save by claiming for previous years. This can be a great way to ensure you have saved into your pension the absolute maximum. Currently, you can go back and utilise any leftover allowance from the previous three tax years as long as you meet the required criteria.
Pensions and their options can be confusing, and we know you want to get it right. At Ten Forward Finance, we have years of experience in the financial and business sector, so we can advise on tax benefits and implications, and introduce you to an independent financial advisor who can discuss your options with you. Don’t put it off any longer – all you need to do is pick up the phone and give us a call, and we can help you get started.
