Top pension tax tips for 2017
Investing for the future is vital if you want to enjoy a financially secure retirement. Pensions can be complicated though, so it’s important to get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips for 2017.
Pensions can provide significant tax benefits, but there are limits on the amount you can save. We explain what you need to know.
Remember that tax rules are subject to change, and the value of tax benefits to you will depend on your personal circumstances.
Make the most of tax relief
One of the biggest advantages of saving into a pension is the boost your contributions receive from tax relief.
You receive tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. That means for every £800 you pay in, the taxman will top it up to £1,000. If you're a higher or additional rate taxpayer you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.
You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.
Please always bear in mind that the value of the tax treatment of pensions depends on your individual circumstances. You should not make contributions to pensions only to secure tax relief.
Understand your limits
There’s a limit on the amount of contributions you can make each year which attract tax relief. This Annual Allowance is currently £40,000, or 100% of your earnings, whichever is the lower.
You can make use of any Annual Allowance that you may not have used during the three previous tax years, as long as you have enough income in the current year to do this. You must have belonged to a registered pension scheme during this period to carry forward unused allowances.
If you choose to take a taxable income once you retire, your Annual Allowance will be reduced to £10,000 or 100% of earnings, whichever is lower, and you won’t be able to carry forward previous unused allowances. This limit will reduce to £4,000 from April 2017.
Your Annual Allowance will also reduce from £40,000 if your income plus your pension contributions totals £150,000 or more. For every £2 in excess of £150,000, your allowance will reduce by £1, until it reaches a minimum allowance of £10,000.
Don’t exceed the Lifetime Allowance
As well as the Annual Allowance, there’s also a maximum total amount you can hold within all your pension funds without having to pay extra tax when you withdraw money from them, known as the Lifetime Allowance.
This is currently £1m in the 2016-17 tax year. It will remain at £1m in the 2017-18 tax year. If the value of your pension savings is higher than this, you will pay tax on the excess, so if you’re approaching this limit, be careful about contributing too much.
Know how much of your pension you can take tax-free
If you’re due to to reach retirement in 2017, you’ll be able to take 25% of your pension fund as tax-free lump sum if you want to, but the remaining 75% will be liable to income tax.
You’ll need to plan any withdrawals you make carefully, as taking large sums from your pension can boost your income in a particular tax year, pushing you into a higher rate of tax so that you pay more tax than you need to.
Seek professional financial advice if you need help working out how much tax you’ll pay on pension withdrawals.
Prepare for the new Lifetime ISA (LISA)
Younger savers aged between 18 and 39 will be able to save up to £4,000 for retirement into a new LISA, which is due to launch in April 2017. If you reach 40 on or before April 6, 2017, you won’t be eligible.
Any contributions made into a LISA will be boosted by a government bonus of 25% (up to a maximum of £1,000 a year) up until age 50. You can take out all your savings from your LISA tax-free after your 60th birthday for use in retirement. Alternatively, the funds can be used after 12 months of account opening to buy a first home valued up to £450,000.
A LISA can be accessed like a normal ISA at any time for any reason, but if you don’t use it for retirement or to buy a home you’ll lose the government bonus and any interest or growth on this. You will also have to pay a 5% charge.
You will be able to have a cash ISA, stocks & shares ISA, innovative finance ISA and a LISA at the same time but you can’t pay in more than the annual ISA allowance in total split across all four ISAs. This tax year (2016-17) the annual ISA allowance is £15,240, rising to £20,000 in the 2017-18 tax year which starts on April 6.
Both pension arrangements and ISAs may involve investment. Remember that investments can fall in value. You may get back less than you put in.
Please bear in mind that this article is for general information purposes only. If you are unsure, seek professional independent advice.
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Investments can fall in value; you may get back less than you invest.