Tax savings on pension contributions remain significant, especially for those earning more than £100,000 or those currently losing child benefit.
Clients earning between £41,450 and £100,000 will save 40 per cent tax on their pension contributions. For those losing child benefit due to their earnings, the tax savings can be even greater as pension contributions can prevent the loss of child benefit. A client with three children could save up to 64.5 per cent tax by paying the right level of pension contribution.
The greatest savings are still for those earning between £100,000 and £150,000, particularly if sufficient contributions are made to maintain the personal allowance. Anyone earning more than £100,000 will lose all or part of their personal allowance. Paying pension contributions can enable you to retain the allowance and achieve a double tax saving.
The savings work as follows:
| Earnings | £120,000 | £130,000 | £130,000 |
| Pension contribution | £20,000 | £20,000 | £30,000 |
| Tax saved at 40% | £8,000 | £8,000 | £12,000 |
| Value of personal allowance retained | £3,776 | £1,776 | £3,776 |
| Total tax saving | £11,776 | £9,776 | £15,776 |
| Percentage tax saving | 58.9% | 48.9% | 52.6% |
For a client earning £120,000, it would only cost them £8,224 to top up their pension fund by £20,000. This can dramatically boost your retirement savings.
With the new pension rules, there is no obligation to turn your pension into an annuity. It can remain invested with you drawing an income from the fund.
Alternatively, some clients may be able to convert part of their pension to an annuity and draw their remaining pension pot as a lump sum.
Clients who have made substantial pension contributions in recent years or who have pension pots which could exceed £1.25 million may be restricted in the amounts that they should pay into pensions.
Most clients will have the opportunity to save substantial amounts of tax on their pension contributions and then to draw their pension in a flexible way at retirement.
If you need help with planning for your retirement then our team of pension specialists will be able to meet you and explain how the tax savings can help with your plans. To find out how we can help you, please contact us.