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10 reasons to pay into your pension before 5th April 2017 – Part 1

Since the change of legislation that allows people to access their pension at retirement, in a more flexible manner, pensions are steadily becoming more popular. Pension holders are now taking more interest in their pensions and how they may be able to use them in retirement. More importantly, more are asking “do I have enough saved into my pensions, to lead the lifestyle I want in retirement?”

Pensions remain the most tax efficient way to save for retirement. The new freedoms have removed any lingering barriers to accessing funds and passing on unused funds on death. To ensure you don't miss an opportunity for a top up, to your pensions, this week, here are 4 reasons to fund your pension before 5th April 2017. There will be another 6 reasons in next week’s article.

1. Tax relief at highest rates
  • Successive Chancellors have decided against cutting the rate of tax relief on pension saving. But with the spotlight constantly falling on pension saving incentives at each Budget, relief at the highest rates may not be around forever.
  • Additional and higher rate taxpayers may wish to contribute an amount to maximise tax relief at 45%, 40% or even 60% while they have the opportunity. Carry forward can allow contributions in excess of the current annual allowance without any annual allowance tax charge.
2. Avoid the annual allowance (AA) cut for higher earners by using carry forward
  • Some high income earners will face a cut in the amount of tax-efficient pension saving they can enjoy this tax year. The standard £40,000 AA will be reduced by £1 for every £2 of 'income' you have over £150,000 in a tax year, until your allowance drops to £10,000.
  • But it's possible that some of you may be able to reinstate your full £40k allowance by making use of carry forward. The tapering of the annual allowance won't normally apply if income less personal contributions is £110k or less. A large personal contribution using unused allowance from the previous 3 tax years can bring income below £110k and restore the full £40k allowance for 2016/17. And some of it may attract 60% tax relief too.
3. Last chance for a £50k carry forward
  • This tax year is the last opportunity to carry forward unused annual allowance from 2013/14 when it was still £50k. If it isn’t used, the additional allowance will be lost and future carry forward limited to a maximum of £40k per year.
  • The maximum carry forward of unused allowances for the current year is £130,000, being £50,000 for 2013/14 plus £40,000 from 2014/15 and 2015/16.
  • Next tax year this will settle at £120,000, as all carry forward years will have a maximum allowance of £40,000.
4. Boost pension funds now before accessing them flexibly
  • Anyone looking to take advantage of the new income flexibility for the first time may want to consider boosting their fund before April, potentially sweeping up the full £40,000 from this year plus any unused allowance carried forward from the last three years.
  • The Money Purchase Annual Allowance (MPAA) will mean the opportunity to continue funding will be restricted. The MPAA is currently £10k but is set to fall to £4k a year in April - with no carry forward.
  • You may be able to avoid this allowance cut completely, if you are already in capped drawdown, (and stay in capped drawdown), or only take your tax free cash. In these circumstances, you can access your pension pot and still retain your full £40,000 allowance.

Next week, I will share with you another 6 reasons to top up your pension now.

Source – Standard Life

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