Year end financial planning

The end of the tax year is an opportune time to review your finances, especially when it comes to your pension. It’s the last opportunity to make use of your annual allowances before the start of the new tax year.

There is increasing speculation around changes to the UK’s system of retirement savings. Previous governments have considered reforms to the pension tax system due to the increasing costs of tax relief and who knows what the future may hold. It is worth noting however that the current tax reliefs and benefits are very favourable and this offers a great opportunity for individuals to maximise reliefs where they can.

Whenever you make a contribution to your pension, the government adds money too. This is called tax relief and is one of the main advantages of using a pension to save for retirement. You qualify for tax relief if you’re a UK resident under the age of 75. Tax relief is limited to the greater of £3,600 gross per annum, or 100% of relevant UK earnings in the tax year the contribution is paid.

The government will add basic rate tax relief when you contribute into a pension. For instance, to contribute £10,000, you put £8,000 into your pension and the government adds £2,000. Additional tax relief can be claimed in your self-assessment if you are a higher or additional rate taxpayer.

There is also an annual allowance for contributions. Generally, you and your employer can contribute up to £40,000 each tax year. There are a few exceptions which might mean your allowance is lower. For example, individuals with earnings exceeding £150,000 per annum may be subject to the tapered annual allowance whereby their allowance of £40,000 is reduced by £1 for every £2 of income over £150,000. The annual allowance would be reduced to a minimum of £10,000 for those with an income over £210,000. Furthermore, if you have flexibly accessed your pension you can only contribute up to £4,000 each year.

Individuals can also benefit from carry forward relief. Carry forward allows pension savers to contribute more than the annual allowance without incurring tax charges. Where some or all of the annual allowance for a particular tax year is not used, this unused allowance can be carried forward from the previous 3 tax years.

Before you taken any action, you should speak to your Financial Planner. Along with identifying how much you can contribute to your pension, your Financial Planner can help you in terms of the ‘bigger picture’ planning, for example, how much income do you need in retirement? Are you on track to achieve this? Are your existing pensions aligned with your own needs and objectives?

By working with you through these types of questions, and aligning the responses with your personal goals, your planner should be able to consider the best ways to assist you for the year ahead to ensure it is aligned with your longer-term goals.