Pension planning – A slow start can be costly

Tax Comments Off on Pension planning – A slow start can be costly

According to a recent study, two in five pensioners regret retirement-planning mistakes which have left them struggling financially.1 Nearly one in five say that they didn’t save enough for retirement, and 15% regret not starting to save earlier in their working lives.

If we’re serious about planning for the future, we need to put away surplus income today, since doing so funds our lifestyles tomorrow.

Pension contributions attract tax relief on the way in and they accumulate capital gains free of tax once inside. When you access your pension savings, the first 25% is normally tax-free. While you cannot draw benefits until your 55th birthday, this can also be an advantage as it restricts the temptation to tap into your retirement fund before then.

How much pension income you need in retirement will be determined by a number of factors, including your health, your living expenses and your desired lifestyle. Unfortunately, there’s no one-size-fits-all answer.

You can put as much as you want into your defined contribution pension each year, but you’ll normally only get tax relief on contributions up to £40,000. If your scheme operates what is called a ‘relief at source’ arrangement, your pension provider will add tax relief of 20% to your pension contributions, and then you can claim anything above the basic rate via your annual tax return. A £40,000 contribution could effectively cost a higher rate taxpayer just £24,000.

Moreover, you can make use of allowances from the three previous tax years if these haven’t been utilised. This year is particularly important, especially for higher earners, as it is the final chance for pension savers to use the £50,000 allowance that was in place in 2013/14 – before it was reduced to £40,000. If it is not used before 6 April 2017, it will be lost forever.

The fact remains that the best way to secure a comfortable retirement is to save as much as possible as early as possible in your working life, and take financial advice. The longer you delay saving, the harder it will be to build the kind of fund that will see you through retirement.

If you would like any specific pensions advice please do get in touch with Sue Stephens in our Tax Department.