Five (easy) steps to pension perfection (Part 3 – Maximising tax relief)

In our continual bid to help as many people as possible reach the goal of having a ‘financially secure and comfortable retirement’, we present and comment on some of the interesting articles we see. During January, one such article appeared in The Telegraph. It listed ‘five steps to pension perfection’ (read the article, https://bit.ly/2ivKjl6) and we thought it so good that we decided to comment on each of the five steps in a mini-series.

It comes at a particularly appropriate time as we’re putting the finishing touches to the ‘Pensions’ section on our website (visit Pensions, https://bit.ly/1H1aMMB) There’s a lot of useful information in this section and we hope we’ve presented it in an easy-to-read yet informative way. Our aim is to make the subject of pensions less intimidating so we recommend you visit the website if you’d like more information about what we’re saying here.

The Telegraph’s Sam Brodbeck suggests anyone wanting to get a grip of their pension does so in five steps: 1) make sure you know what you’ve got; 2) boost your contributions; 3) maximise tax relief; 4) match your investments with your plan, and 5) consider alternatives.

Pension schemes are one of the most efficient forms of investment as you benefit from tax relief which, of course, offers a huge advantage over any other form of savings plan. The reason for this is that any contribution you make to your pension scheme is considered to be a net contribution rather than a gross contribution. However, although you are eligible to receive tax relief at the highest marginal rate of income tax you pay, your pension scheme provider only claims tax relief at the basic rate, leaving you to claim any higher or additional rate tax relief.

To put this into perspective, if you make a personal net contribution of ￡100 a month to your pension scheme and pay tax at the basic rate of 20%, your pension provider will claim ￡25 tax relief from the Government and add it to your pension pot, making your gross contribution ￡125.

However, if you are either a higher-rate tax payer (over ￡43,001 taxable income) or an additional-rate taxpayer (over ￡150,000 taxable income) then the onus is on you to claim the additional tax relief you are owed using your annual self-assessment tax return. If you are making a net contribution of ￡100 a month but are a higher or additional-rate tax payer, then your pension scheme provider will claim the first 20% (￡25) back and add it to you pension pot – leaving you to claim back the remaining 20% (higher rate) or 25% (additional rate) respectively.   

So, if you are a higher-rate tax payer, then for every ￡100 you are contributing you may be losing out on ￡25 in tax relief and if you pay additional-rate tax, the figure jumps to ￡31.25. As The Telegraph article points out, it’s estimated that around ￡360million in pension tax relief will go unclaimed this year. Have you claimed yours?

By necessity, this is a very brief summary of a complex subject and, before you do anything, you should talk to a suitability qualified, independent financial adviser.  One Financial Solutions is here to help you. As independent financial advisers we’ll review your circumstances and help you make a decision that’s best for you. It’s good to talk so please call us on 020 3714 9565 for a confidential chat or ask us to call you by sending an email to [email protected].