If you are a long way from retirement, you may not feel ready to think seriously about savings for your twilight years, but using the reliefs, exemptions and allowances you are entitled to can make your pensions savings work much harder for you. There is merit in the belief that acting sooner rather than later can have a huge effect in the longer term. If you take the time to understand your retirement savings now, you can make life so much easier financially in the years to come.
We must also consider the current economic climate. With uncertainty regarding inflation rises and the prospect of consumers being further squeezed financially in the future, it is wise to use any available opportunities now to provide us with solid foundations for the future.
The allowances, exemptions and reliefs you are entitled to can make an enormous difference to the values of your retirement savings pots. Even in times of economic instability, these advantages are available to be utilised. As with any offer, terms and conditions apply. In some instances, it is a case of ‘use it or lose it’, however if used effectively they can have a significant impact and can provide you with some added peace of mind.
Let’s take a moment to focus on pensions. If you have a workplace pension, it is likely that your employer is contributing to this. You can also receive tax relief on personal contributions to the same pension pot – subject to certain limits. In essence, this is the taxman contributing significantly to your pension. A lovely concept!
For example, if you are a basic rate taxpayer and want to contribute £100 into your pension, you would only need to pay £80, with the government contributing the additional £20. If you are a higher rate taxpayer, you get 40% tax relief, meaning for the same £100 contribution you would only need to pay £60. If you are an additional rate taxpayer then you get a 45% tax relief on your contributions. It is important to note that is you are a higher or additional rate taxpayer, the additional relief over the basic rate is claimed via a tax return.
Let’s not forget that there are no guarantees that these reliefs will remain in the long term and there may come a time where they are no longer available. It makes prudent financial sense to make the best use of them whilst we can.
There are other tax benefits to pensions that are worth making the most of whilst they are available. If you are able to use the full pension allowance, capped at £40,000 for the past few years, but have failed to do so in the past, you may be able to use the concept of ‘carry forward’ which can give the opportunity to give your pension a significant boost. Carry forward can be a complex subject, which could result in significant tax charges if not used correctly, therefore we recommend consulting with a financial adviser to discuss your personal circumstances in more detail.
Many are now using ISA’s (Individual Savings Accounts) as a way of boosting their retirement savings especially if you are in danger of saving more than the lifetime allowance in pensions. As with personal contributions to your pensions, the money deposited into an ISA is generally from your taxed income, however there is no capital gains or income tax applicable on any interest or dividends you receive. Maximising your ISA’s can be a tax efficient way of making the tax rules work in your favour and give your retirement savings a boost.
In an ideal world, most will review their retirement savings plans early in their working life, whilst in their 20’s and 30’s, however in reality this is not always possible. Making the most of your available tax-reliefs and allowances can be vital if you find yourself addressing your retirement plans later in life and you need to make up for lost time.
For those who are just starting their professional lives, retirement can seem a long time away, and saving for your retirement may not be a priority. However, if you spend some time getting this right at a younger age you will without doubt thank yourself much later in life. There is also a potential significant personal cost to you in delaying contributing to your retirement funds, given the potential for lost investment returns compounding over the longer term.
It can be daunting coming up with a retirement plan on your own, whatever your stage of life. Speak to a financial adviser who can help you identify any gaps in your plans and make sure you are not missing out on any reliefs and allowances you are entitled to.
Email: hello@taylorwealth.co.uk
Tel: 01245 520 001
A pension is a long-term investment, any advice or considerations are personal to each individual’s circumstances. The value of your investment and the income from it may go down as well as up.
Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.
The value of any investment will be directly linked to the performance of the underlying funds selected and may fall as well as rise. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
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