Tax Year End: How to do more with your Pension
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
The end of the tax year is upon us, but there’s still time to do more with your money and benefit from tax allowances when investing.
Here are ways you can help boost your Pension before April 5th.
What is a Pension?
Starting with the basics, a Pension may be the key to your future. It is a long-term investment you build up over your career, with the aim of funding a comfortable retirement.
There are major tax benefits to a Pension. You receive tax relief when saving into a Pension, with 20% being automatically added and relief of 40% and 45% available for higher and additional rate taxpayers.
There are different types of Pension. There’s the Workplace Pension, which can also be known as auto enrolment, where your employer enters you into a Pension. Typically, your employer wil contribute a minimum of 3% of your qualifying earnings and you’ll make up the difference for a total of 8%. Alternatively, you could set up a Personal Pension, giving yourself greater choice in where your money is invested, such as the True Potential Personal Pension invested in the globally diversified True Potential Portfolios.
You’ll also have heard of the State Pension, which will pay you a sum of money based on enough years of National Insurance contributions. Studies have shown this is unlikely to be a significant sum, which is why it is so important to pay into a Pension and use allowances before tax year end.
Use your Pension allowance.
You can pay as much as you like into a Pension, however there is a limit on how much is tax-free.
You can contribute tax free up to 100% of your earnings to your pension each year or up to the annual allowance of £40,000 (2021/22). 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 annual allowance will renew once this tax year has ended. Consider making the most of this year’s allowance by paying more into your Pension plan now.
Unlike the ISA allowance, the Pension annual allowance can be used in multiple tax years through a process called ‘carry forward’. This allows you to use up any unused allowance from three previous tax years, as long as you held a UK Pension in those years.
Consolidate your Pensions
As you consider making the most of your allowance at tax year end, also consider consolidating your Pensions. It is possible as you change jobs that you’ll accumulate more than one Workplace Pension. Consolidating into one Pension makes tracking your pension much easier, and could even reduce the fees you pay overall.
It isn’t just that tax year end is coming up, it makes sense generally to invest as much as you can and as early as you can. This can give your investment more time to benefit from compound growth.
You should also consider the high inflation rate we’re currently experiencing, meaning money not invested is losing value. You can protect your cash in investments such as ISAs and Pensions. Products such as ISAs and Pensions can be invested in Portfolios that have the potential to grow beyond the rate of Inflation.
Why invest your Pension with True Potential?
Investing with True Potential means you benefit from award-winning technology, world class fund managers, and globally diversified Portfolios that aim to minimise risk and maximise reward. Our in-house Investment Management team work with Fund Managers such as UBS and Allianz to invest your money, and you can track performance in the True Potential app.
You’ll also find daily video updates within the app to explain True Potential Investments take on what is going on in markets, as part of our daily Morning Markets series.
What to do next
Consider your disposable cash and if you can add to a Pension before tax year end, giving yourself the opportunity to fully utilise your allowance and beat inflation. Make sure to asses your attitude to risk, can you afford to lose what you invest if markets didn’t grow?
The tax year starts again on April 6. By investing early in the tax year you are giving your money more time to grow, potentially compounding towards greater wealth.
Do more with your money, invest in your Pension today.
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 or a personal recommendation.