Can you clarify how the pension contribution allowances apply, especially when you’re in work and after you’ve retired?

Steve

Tom Selby, AJ Bell Head of Retirement Policy says:

One of the key benefits of pensions is they benefit from generous income tax relief, where you get back the tax you have paid on your income:

– The part of your income on which you have paid up to 20% tax gets 20% relief

– The part on which you have paid 40% tax gets 40% relief

– The part on which you have paid 45% tax gets 45% relief

To control the cost of incentivising retirement saving, the Government places limits on how much you can contribute to a pension each year and benefit from tax relief.

The first of these limits is your annual earnings. The amount you personally contribute to a pension each year is restricted to 100% of your ‘relevant earnings’.

So, if your relevant earnings are £30,000, this is the total you can personally contribute to a pension in that tax year and receive tax relief. In other words, you contribute £24,000 and HMRC contributes £6,000.

Relevant earnings include things like salary and bonuses. They do not include pension income, investment income or any earnings you receive from buy-to-let properties.

If you don’t have any relevant earnings, you can still contribute up to £3,600 – inclusive of tax relief – into a pension each year. Once you reach your 75th birthday, you are no longer entitled to tax relief on your pension contributions.

The overall total that can be paid into your pensions in the tax year is controlled by the ‘annual allowance’, which for most people stands at £40,000. This annual allowance includes your personal contributions, any employer contributions you receive and upfront tax relief.

It is also possible to ‘carry forward’ unused allowances from the three previous tax years, although your personal contributions will still be limited to 100% of your earnings.

There are two further allowances – the ‘money purchase annual allowance’ (MPAA) and the ‘tapered annual allowance’.

If you flexibly access taxable income from your pension, the MPAA will kick-in, reducing your annual allowance from £40,000 to just £4,000. You will also lose the ability to carry forward unused allowances.

Your annual allowance may also be lower than £40,000 if you are a very high earner. The annual allowance ‘taper’ applies if you have ‘adjusted income’ of over £240,000 and ‘threshold income’ of over £200,000.

The taper reduces your annual allowance by £1 for every £2 of income over and above the £240,000 adjusted income threshold, to a minimum of £4,000 for those with adjusted income of £312,000 or more.

If you are affected by the taper, this guide might be useful. If you’re a high earner or looking to make large contributions, I’d consider speaking to a regulated financial adviser to better understand the rules and your options.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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