How to use your Pension annual allowance
The 2022/23 tax year is approaching its end, and now is the time to think about doing more with your money before deadline day on April 5.
What you do today could make a real difference to your future, particularly if you are investing in a Pension.
Why a Pension?
A Pension is a long-term investment that aims to grow your money towards funding a fulfilling retirement. The earlier you start investing in a Pension the better, as this gives your money more time to potentially grow and benefit from compound growth.
There are tax advantages to a Pension. Even before you’ve even thought about growth, you’ve already made your money go further by benefiting from tax relief.
You receive tax relief when making eligible contributions into a Pension, with 20% being automatically added and relief of 40% and 45% available for higher and additional rate taxpayers. A Pension is a great way for keeping more of your salary, rather than losing out to the taxman.
Use your Pension annual allowance before tax year end
You can pay as much as you like into your Pension, but there is a limit to the amount you can pay in that will be tax free.
In most cases, your Pension Annual Allowance for the 2022/23 tax year will be £40,000. You can contribute up to 100% of your earnings to your Pension each year or up to the pension annual allowance of £40,000.
This means the total sum of any personal contributions, employer contributions and government tax relief received can’t exceed the £40,000 annual pension allowance.
Contributions that exceed your annual salary or the £40,000 allowance are subject to an annual allowance charge in line with income tax. However, if you’re a higher earner, it may be less, depending on how much you earn. Remember, thanks to 20% tax relief, a contribution of £32,000 will add up to £40,000 when it is added by the government.
Your pension annual allowance will renew once this tax year has ended. Consider making the most of this year’s pension annual allowance by paying more into your Pension plan now. This gives you more time invested the markets and also means you can start the 2023/24 tax year afresh on April 6.
Carry forward your pension annual allowance
Unlike an ISA allowance, you are able to carry forward you annual allowance. This allows you to use up any unused annual allowance from three previous tax years, as long as you held a UK Pension in those years.
It still makes sense to use your allowances as early in the tax years as possible, as this means you have more time in the markets and more time for potential growth. With high inflation ahead of interest rates, money left as cash is losing buying power. When invested in a Portfolio within your Pension this money could grow over time and negate the corrosive effect of inflation.
Don’t forget your missing Pensions
When thinking about your Pensions at tax year end, it is also a good opportunity to consider if you could have any lost or missing Pensions. Or perhaps you know you have other Pensions and didn’t realise that you could consolidate these into one.
The advantage of consolidating your Pensions is you will be able to track your investment performance all in one place. It may also mean lower charges instead of paying for multiple policies – meaning more of your money could be invested towards retiring. However, be aware that some Pensions you are invested in may have exit fees and certain Pensions can provide valuable guarantees, such as guaranteed annuity rates, protected higher tax-free cash percentages and protected retirement ages.
Finding lost Pensions can be easy, simply give our missing Pensions team a call at True Potential on 0191 625 0350
Start again on April 6
Once you’ve got your finances in order for the end of the 2022/23 tax year, get yourself set to go again at the start of the new 2023/24 tax year.
From April 6, the start of the 2023 /24 tax year, you’ll be able to invest a fresh Pension annual allowance of up to 100% of your earnings or up to the annual allowance of £40,000.
Remember, the earlier you are invested, the more time you have to benefit from growth in the markets and subsequent compound growth, as well as the tax advantages and advantages of sheltering your money from current high inflation.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.