If you’re yet to retire, the financial decisions you make now could affect how comfortable your retirement is. As the end of the tax year approaches, maximising your allowances can improve your finances now and when you retire.
The 2021/22 tax year will end on Tuesday 5 April 2022. On this date, some of the allowances and exemptions that could help your money go further will reset. By using these two allowances before the deadline, you can tax-efficiently increase how much money you have for retirement.
1. Pension Annual Allowance
While there is no limit on how much you can place in your pension, there is a limit to the total amount you can save each tax year before a tax charge may apply. This limit is known as the “Annual Allowance”.
The Annual Allowance is the total amount you can place in a pension in a tax year, so it’s not just your contributions you need to consider. You may also need to calculate how tax relief, employer contributions, and contributions from other parties add up when calculating how much Annual Allowance you have left.
For many people, the Annual Allowance is £40,000 or their annual income, whichever is lower. If you’re in a position to top up your pension before the end of the tax year, it can give your retirement income a boost. Not only will your contributions benefit from tax relief but the money will typically be invested. This provides your retirement savings with an opportunity to grow. However, keep in mind that you cannot guarantee investment results, and the value of your investments could fall.
If you want to boost your finances in retirement, increasing pension contributions and making the most of the Annual Allowance can make sense. However, you should keep in mind that your money will be locked away: in most cases, you cannot access your pension until you turn 55, rising to 57 in 2028.
You can carry forward your Annual Allowance for up to three years. So, this is your last opportunity to use your allowance from the 2018/2019 tax year.
There are two main reasons why your Annual Allowance could be lower:
- The Tapered Annual Allowance: If your threshold income is more than £200,000 and your adjusted income is more than £240,000, your Annual Allowance will be lower. For every £2 your income exceeds the threshold, your Annual Allowance will reduce by £1. The maximum reduction is £36,000, leaving some pension savers with an Annual Allowance of £4,000.
- The Money Purchase Annual Allowance: If you have already accessed your pension to draw an income, you may be affected by the Money Purchase Annual Allowance. This will reduce the amount you can tax-efficiently pay into your pension to £4,000.
If you exceed the Annual Allowance, your contributions won’t receive tax relief and you could face an additional charge. So, it’s important you understand what your Annual Allowance is. If you have any questions, please contact us.
2. ISA allowance
An ISA can be used as an effective way to save or invest for a variety of reasons, and it can be a useful way to build up retirement savings alongside your pension.
If you want flexibility, an ISA can make sense. You can withdraw funds to meet other goals and emergencies, so an ISA can act as a fund that supports both your short- and long-term goals. Each tax year, you can place up to £20,000 into ISA accounts. However, if you don’t use this allowance by the end of the tax year, you will lose it.
One important consideration when adding money to an ISA is whether to save or invest.
With a Cash ISA, your deposits will earn interest. However, as interest rates are likely to be lower than inflation, your money may lose value in real terms. With a Stocks and Shares ISA, your deposits have an opportunity to deliver investment returns that outpace inflation, but your money would be exposed to investment risk.
Your goals and time frame should play a role in your decision. As a general rule, you should consider investing for goals that are five years or more away. A longer-term time frame can help smooth out the volatility you may experience when investing. If you’re not sure which option is right for you, we can help you see how using your ISA allowance can help you reach your goals.
Planning for retirement now
Even if retirement is many years away, the financial decisions you make now can affect how comfortable you’ll be. Being proactive means you can make the most of allowances and other opportunities now that could help you build up a fund you can use to create an income in retirement. To put in place a financial plan that could secure your retirement, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.