MAY I suggest a New Year’s resolution? Spend some time thinking about whether you should top up your pension pot. It does not have to take long, and there are a number of good reasons why it is important to act sooner rather than later.
One is that chancellor George Osborne announced changes to the annual and lifetime allowances on pension contributions in his Autumn Statement last December. From April 2014, the annual allowance will drop from £50,000 to £40,000, while the lifetime allowance will fall from £1.5m to £1.25m. This is the overall ceiling on the amount allowed for tax-relieved pension savings which includes contributions and any investment returns earned until you benefit from your pension. Although none of this kicks in until the end of the next tax year in April 2014, now is a good time to maximise your pension savings.
Those concerned about the new lifetime allowance can also register for fixed protection 2014. This allows you to leave your tax-relieved pension pot at retirement at £1.5 million, rather than £1.25 million. But, once registered, you will not be allowed to make any further contributions. Remember, this allowance includes investment growth, not only contributions, so make sure you leave enough headroom for your investments to grow.
Another compelling reason for looking at your pension this new year is because of the carry forward rule. If you did not use up your full annual allowance in the last three tax years, you can carry your leftover tax relief into the current tax year. In short, you have until April 2013 to use up your allowances for the tax years 2009-10, 2010-11 and 2011-12. You can contribute more than your annual allowance this tax year without incurring a charge.
However, the ability to go back three years and use up your remaining tax relief operates on a rolling basis. Therefore, any unused tax relief from the 2009-10 tax year will be lost if it is not used up before the end of this tax year in April 2013.
According to pensions tax expert David Fairs of KPMG, although you might think you have plenty of time to organise your pension savings before these measures kick in, you shouldn’t leave it to the last minute. Pension rules are complex and can seem daunting, so seek professional advice if you are unsure.
More importantly, make sure the tax savings you gain are not eroded by unnecessary fees. Some personal pensions are very complex but most are a simple way to take advantage of tax breaks. Good service and choice shouldn’t lead to extra costs. Be aware that some providers charge more than the annual management fee of the underlying funds, so do your research to ensure that you’re getting good value for money – high charges compound over time and can easily reduce your pension fund’s overall return.
So, why not kick start 2013 with your pension affairs in order? Spending a small amount of time on it now could make a huge difference in the future.
Chris Davies is head of Fidelity Wealth.
CASE STUDY: PENSION CONTRIBUTIONS
KPMG pensions tax partner David Fairs illustrates the benefit of contributing more towards your pension in this tax year:
Tax Year Contributions
John Smith has previously made the pension contributions listed above. John’s total contributions are £81,000. He had the option to contribute £50,000 in each tax years. Therefore, he still has £69,000 of tax relief available that can be carried over, in addition to the £50,000 that is available in the current tax year. John can contribute £119,000 into his pension pot in the 2012-13 tax year, including relief. If John is a top rate tax payer, making these contributions this year rather than next could save him up to £5,950, due to the reduction in the top rate of tax.