The last part of our quick wins for busy people series on reducing your tax bill.
4. Pension Contributions
You’ll receive tax relief on all payments you make into your pension – whether it’s a company pension, personal pension or stakeholder pension – if HMRC has approved the pension scheme. This means that for every £100 you put in, HMRC will put in an extra £25 FREE – more if you are a higher rate taxpayer.
The tax relief is available on contributions up to 100% of your annual earnings – i.e. if you earn £30,000 a year, you can get tax relief on up to £30,000 paid into your pension in a single tax year, up to a maximum contribution in any one year of £40,000. This is called the annual allowance.
This means that you could pay an extra lump into your pension pot if you receive an inheritance, lottery win or bonus and benefit from the additional tax relief as well as tucking the money away for that time in life when you don’t want to work as hard.
Most employees will now be provided with a workplace pension due to the government autoenrollment scheme chosen by their employer which will give them additional income in retirement above the state retirement pension. The employer will often will only deduct the legal minimum from your pay and contribute the minimum amount themselves. This may mean that your pension pot is not the size that you would hope for to have a comfortable retirement.
If you can afford to, look to increase your pension contributions voluntarily – you may find that your employer will contribute more too – but even if they don’t you’ll benefit from the additional tax relief.
Some company pension schemes are much better than this, and you should find out more from your payroll / personnel department about the type of schemes you are eligible to join and what type of benefit you could expect to receive. In either case you should receive an annual benefit statement showing the current value (if you stopped paying in now and left the pot until retirement, or moved it to another pension scheme) and a projected figure based on you continuing contributions until your expected retirement date. Keep an eye on these and periodically check that you are building up a pot sufficient to last your retirement.
If you are self-employed and don’t want to rely on the State Retirement pension (currently £164.35 a week) then you will need to arrange your own pension scheme and decide yourself how much to pay into it. Your accountant can help you work out if your Limited company should/could also contribute to your pension as part of your salary package – which saves Corporation (business) tax.
Although you can sort this new pension out yourself getting help from a Financial Adviser will smooth the process and help you calculate how much you should put away each month / year to reach the amount needed for a sustainable retirement income.
A recent survey by Old Mutual Wealth/YouGov showed that the average UK income in retirement is £19,000 per annum. However, the average for those who set goals working with a financial adviser is £26,000. Put another way, by not working with a financial adviser a client can potentially lose out on an extra 36.8% or as much as £157,000 over the course of a 21 years retirement!