Understanding your pension allowances and rules

Investing in your pension can provide many benefits – from tax-efficient savings to effective preparation for when you retire.

However, to optimise your pension savings, it’s important to understand how your pension allowance works, as well as other rules such as those on your drawdown options.

Read on to find the answers you’re looking for when it comes to your pension allowances and rules.

As always, speak to your online wealth manager to find out how these aspects apply to your unique situation.

What is your annual pension allowance?

Your annual pension allowance is a set limit on the amount you can contribute to your pension each year whilst still receiving shelter from tax.

For the current 2023/2024 tax year, the annual pension allowance is £60,000.

If you have a threshold income over £200,000 and an adjusted income over £260,000, you’ll have a tapered annual allowance. For every £2 your adjusted income goes above £260,000, your annual allowance reduces by £1.

Any money contributed up to your allowance will be tax-free, but anything exceeding this limit will be subject to tax charges.

How much tax do you pay when exceeding your allowance?

Any amount you contribute to your pension above the annual allowance will be included in your Income Tax charge. The current rates are:

  • Basic rate – £12,571 to £50,270 – 20%
  • Higher rate £50,271 to £125,140 – 40%
  • Additional rate – Over £125,140 – 45%

Speak to your pension provider to find out how much you’ll need to pay if you exceed your annual allowance, and how you can pay it.

What are your options for pension drawdown?

It’s also important to know the rules surrounding your pension drawdown and what options you have.

Drawing down on your pension simply means how you choose to access your savings when you retire. However, there are tax rules that may apply to your withdrawals, and it’s good to know how these might impact your wealth.

When withdrawing your pension, you’re able to access up to 25% of your total pension pot tax-free, which can all be taken out as an initial lump sum. 

After that, the remaining 75% of your pension pot can be withdrawn at any time, but tax charges will apply.

Investors can therefore choose how to proceed:

  • Take the remaining amount as one lump sum
  • Keep the rest of the savings invested with a provider and take out lump sums when needed
  • Keep the rest invested, and withdraw regularly as a monthly income
  • Buy an annuity that offers a guaranteed income for life, paid for with pension savings

Whatever option you choose, the main things to consider are how your remaining savings invested are performing, and how the tax charges on the remaining 75% could impact your wealth.

With a newfound understanding of your pension allowance and rules, you’re now ready to start saving tax-efficiently for your retirement.

Are you currently making the most of your pension allowance, or could you be optimising your investments for the best chance of success with your retirement?

Please note, the value of your investments can go down as well as up.

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