Maximising Investment Planning as You Approach 55

If you have existing cash savings, you can use them to reclaim tax and add significant value to your retirement pot. By contributing these savings to a personal pension, you can secure tax relief at your highest marginal rate, effectively boosting your pension by up to 60% (if reclaiming the personal allowance). Once you reach the minimum pension access age (currently 55), these contributions can be accessed flexibly, potentially at a lower or even zero tax rate depending on your income in retirement. This strategy not only enhances your savings but also provides tax-efficient access later.

Why Tax Planning Matters for High Earners

If your earnings fall between ￡100,000 and ￡125,140, you are subject to an effective 60% tax rate due to the withdrawal of the personal allowance. For every ￡2 earned over ￡100,000, you lose ￡1 of your personal allowance, creating an unusually high marginal tax rate. By making personal pension contributions funded from existing cash savings, you can reduce your taxable income and reclaim these allowances.

Similarly, if you earn between ￡125,140 and ￡240,000, pension contributions can still provide substantial tax relief by reducing your exposure to the higher (40%) or additional (45%) tax rate. Using cash savings to fund these contributions can amplify your overall retirement planning strategy.

How Pension Contributions Reclaim Tax

Personal pension contributions can be made from savings or surplus income. When you contribute to a pension, the government automatically “grosses up” your contribution by adding basic-rate tax relief (20%). Higher-rate (40%) and additional-rate (45%) taxpayers can claim further tax relief through their self-assessment tax return.

Example: Reclaiming the Personal Allowance (Using Cash Savings)

Consider a high earner with an income of ￡125,140, who has lost their full personal allowance (￡12,570). To reclaim this, they decide to fund their pension contribution from cash savings:

• Net Contribution: ￡20,112 (paid from cash savings).
• Gross Contribution: The government adds basic-rate tax relief (20%), increasing the contribution to ￡25,140 (￡20,112 ÷ 0.8).
• Tax Savings Breakdown:Reclaiming the personal allowance (￡12,570) saves ￡5,028 in tax (40% of ￡12,570).Higher-rate tax relief on the pension contribution (￡25,140) adds a further ￡5,028 (40% of ￡25,140 – 20% already added).Total Tax Savings = ￡10,084.

• Net Contribution:?￡20,112 (paid from cash savings).
• Tax Savings Breakdown:Basic-rate tax relief?(25% of the net contribution =?￡5,028), increasing the contribution to ￡25,140.Reclaiming the personal allowance saves?￡5,028?in tax (40% of ￡12,570).Higher-rate tax relief on the gross pension contribution (￡25,140) adds a further?￡5,028?via higher-rate tax relief(￡25,140 x 20%, reclaimed via self-assessment).Total Tax Savings = ￡15,084.

In summary:

• ￡25,140 gross pension contribution, ￡15,084 tax saved
• Effective Tax Saving Rate: 60%

For every ￡1 contributed to the pension, the individual saves 40p in higher-rate tax and an additional 20p by reclaiming the personal allowance, resulting in an effective tax-saving rate of?60%.

Example: Higher-Rate Taxpayer Benefits (Using Cash Savings)

An individual earning ￡200,000 contributes ￡60,000 (the full annual allowance) to their pension, funded from existing cash savings:

• Net Contribution: ￡48,000 (paid from savings).
• Gross Contribution: ￡60,000 (￡48,000 ÷ 0.8, including basic-rate tax relief).
• Tax Savings Breakdown:Higher-rate tax relief (40%) = ￡24,000.Basic-rate relief already added = ￡12,000.

At the end of the tax year, they claim the additional ￡12,000 in higher-rate tax relief through self-assessment, reducing the effective cost of their contribution:

• ￡48,000 (paid in) – ￡24,000 (tax saved) = ￡24,000.

This shields ￡60,000 from higher-rate tax, significantly enhancing retirement savings while reducing taxable income.

Boosting Contributions with Carry Forward

If you haven’t used your full annual pension allowance in the previous three tax years, the carry forward rule allows you to contribute above the current ￡60,000 annual allowance and still receive tax relief.

Example: Maximising Carry Forward (Using Cash Savings)

Assume you earned sufficient income to utilise the full annual allowance (￡60,000) in each of the past three tax years but only contributed ￡10,000 annually. You now have ￡50,000 of unused allowance for each of those years. Combined with this year’s ￡60,000 allowance, you could contribute ￡210,000 (￡60,000 + ￡50,000 × 3), funded from cash savings:

• Net Contribution: ￡168,000 (paid from savings).
• Gross Contribution: ￡210,000 (￡168,000 ÷ 0.8).
• Tax Savings Breakdown:Additional-rate tax relief (45%) = ￡94,500 (￡210,000 × 45%).Basic-rate relief already added = ￡42,000.

At the end of the tax year, you claim ￡52,500 in additional-rate tax relief, making the effective cost of the contribution:

• ￡168,000 (paid in) – ￡94,500 (tax saved) = ￡73,500.

This is a highly effective way to enhance retirement savings while significantly reducing your tax bill.

Why Timing is Crucial

The opportunity to reclaim tax allowances through pension contributions diminishes significantly after retirement. Once you stop working or reduce your income, your ability to contribute large sums to your pension is constrained by a reduced annual allowance, which is capped at ￡3,600 if you have no relevant earnings. Making contributions while you are still earning a high income maximises the tax-saving benefits.

How Clarity Wealth Limited Can Help

At Clarity Wealth Limited, we specialise in helping high earners maximise their pensions, reduce tax liabilities, and prepare for a secure retirement. Whether you’re nearing retirement or simply looking to optimise your financial plan, we offer bespoke advice tailored to your unique circumstances.

If you’d like to explore how pension contributions, carry forward rules, and tax planning could work for you, contact us today. Let’s make your retirement transition as smooth and financially rewarding as possible.