Setting Up a Personal Pension
The pension plans which were originally introduced in 1988 have radically changed over the years. They are an extremely flexible savings plan with tax relief on the premiums paid and can grow free of tax whilst the money is invested. Add to that considerable freedom in how to choose to take the benefits including a quarter of the money being paid tax free it is hard to find a better incentive to save.
Personal pensions work by making a lump sum or regular payment into a plan usually monthly and they grow tax free to retirement. Additional contributions can normally be added at any time and you can take a payment holiday whenever you need.
Your contributions are normally topped up with tax relief from HMRC at your marginal tax rate. So if you pay tax at 20% your contribution of £100 will cost you only £80. If you are a higher rate tax payer you can claim back additional tax relief through your tax return.
There are many choices and important considerations to take into account if you are considering setting up a personal pension including the charges, premium minimums and limits, investment options and transfer costs should you want to move the scheme to another provider in the future. For larger investments you should consider a self-invested personal pension which will provide an even wider range of investment options which can include commerical property.
What is the maximum I can save in my pension?
The Annual Allowance is a limit on the amount of pension contributions or pension accruals that can be made each year which would be eligible for tax relief.
For personal contributions, this is currently limited to 100% of your relevant UK earnings subject to an overall annual allowance of:
- £40,000 for the 2022/2023 tax year
- £60,000 from the 2023/2024 tax years
If your adjusted income exceeds £240,000 for the 22/23 tax year, or £260,000 for the 23/24 tax year. you will be subject to the tapered Annual Allowance which reduces the annual allowance by £1 for every £2 of annual income over £240,000, to a minimum allowance of:
- £4,000 for the 2022/2023 tax year
- £10,000 from the 2023/2024 tax year.
If you have not fully utilised the Annual Allowance in previous years, you may be able to carry this unused allowance forward to this tax year.
Money Purchase Annual Allowance (MPAA)
If you trigger the Money Purchase Annual Allowance (MPAA) by previously flexibly accessing pension benefits, there will be a limit on the amount of contributions paid into money purchase scheme that will receive tax relief and is capped at:
- £4,000 for the 2022/2023 tax year
- £10,000 from the 2023/2024 tax year
You must inform the pension scheme providers receiving any future contributions that the MPAA has been triggered and have 91 days in which to do so. Failure to inform the providers may result in a fine.
The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes, whether as a lump sum or retirement income, without triggering an additional tax charge.
The Lifetime Allowance has been fixed at £1,073,100 for the 2022/2023 and 2023/2024 tax years.
2022/2023 Tax Year
Exceeding this allowance can lead to a tax charge of 55% when benefits more than this allowance are taken as a lump sum or 25% if taken as a taxable income.
2023/2024 Tax Year
Exceeding this allowance can lead to a tax charge at the recipient’s marginal rate of tax when benefits more than this allowance are taken as a lump sum.
A pension is a long term investment so it is worth taking time now to consider all your options.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATIONS.
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