Not Optimising Your Pension

Contributing into a company or personal pension is long entrenched as one of the best ways to save and invest for your retirement in a tax-efficient way. Thanks to auto-enrolment legislation, employers and employees are, in most cases, now compelled to make contributions. Governments have incentivised personal saving into pensions by providing tax relief on contributions and, for higher-rate taxpayers, this makes good financial sense.

However, where it was possible as a non-partner fee earner to have pension contributions handled through payroll at your firm, you are now self-employed with greater individual responsibility and greater wealth potential. Is your pension somewhat forgotten and underperforming against its potential?

?

Ever-changing pension rules

Governments have made, and continue to make, seemingly perpetual changes to the rules for pensions, including how and to whom tax relief is available. As things currently stand, there are two main prohibitions, now that the Lifetime Allowance has recently been removed by the government.

• Annual allowance: Based on your earnings and currently is capped at ￡60,000 per year.
• Tapered annual allowance: Reduces the capped amount that a high earner can get tax relief on as their income level rises. The rates change frequently. For the 2023-24 tax year, anyone whose threshold income exceeds ￡260,000 will see their annual allowance reduced by ￡1 of every ￡2 that their adjusted income rises above ￡260,000. Not entirely clear at first pass. The floor or extent to which this can be tapered is to just ￡10,000 per year.

As the rules apply to different definitions of income, both of which start with your total net income and are adjusted from there, it can be very difficult to assess how much pension savings you can make when your exact income is unknown until the end of the year. Contributions require a watchful eye to make sure you’re contributing as much as possible in a tax-efficient way. Carry forward provisions allow you to make use of any unused annual allowances from the previous three tax years, effectively allowing you to catch up on past payments and still benefit from the maximum tax relief. Are you using them?

?

Prioritising your pension

Depending on your individual situation, you may need to load up your pension contributions in the early years of partnership. Once your earnings reach a certain level, your flexibility may become restricted as caps and tapering take effect. The important considerations are:

• Are you contributing as much as possible in a tax-efficient way?
• Are you investing the pension appropriately?
• If your capped contributions are low, how are you going to save the extra you need to fund your retirement?

?

Adrian Johnson?