I am 76 years’ old and retired. My retirement income is the state pension, a small SIPP, dividends and interest.

Can I pay £2,880 per annum into my pension and get £720 back from HMRC?

Bill

Tom Selby, AJ Bell Head of Retirement Policy, says:

Although theoretically there is no limit on the amount you can contribute to a pension each year, in practice tax relief is controlled by government in several different ways. The main ‘annual allowance’ is set at £60,000 for the 2023/24 tax year and covers personal contributions, employer contributions and upfront pension tax relief.

Annual personal contributions are also limited to 100% of UK earnings. This means if someone earns £20,000 in a tax year, this is the maximum they can personally contribute to a pension, inclusive of upfront tax relief, regardless of their annual allowance.

There are two other annual allowances. The ‘tapered annual allowance’ applies to very high earners and can mean your annual allowance drops as low as £10,000. 

The money purchase annual allowance (MPAA) kicks in where you flexibly access taxable income from your retirement pot and reduces your annual allowance to £10,000. The MPAA also revokes your ability to carry forward unused annual allowances from the three previous tax years.

If you are a non-earner and aged under 75, you can still contribute up to £3,600, inclusive of pension tax relief, to a pension each year. That equates to a personal contribution of £2,880, with the remaining £720 provided by basic-rate tax relief at 20%.

Unfortunately, once you reach your 75th birthday, the government stops providing pension tax relief on personal contributions, thus removing the upfront incentive to save through a pension.

It is possible in some circumstances that pension saving will remain attractive after age 75 – particularly if your priority is passing on money tax efficiently to your loved ones after death. Money held in pensions is not usually subject to inheritance tax (IHT), and if you die after age 75 any unused funds will simply be taxed as income when your nominated beneficiary (or beneficiaries) come to make a withdrawal.

If you are looking for an alternative savings vehicle for your spare cash, you can pay £20,000 a year into ISAs, which offer the same tax-free investment growth as pensions and can be accessed tax-free at any time. Bear in mind any ISA funds you have left will count towards your estate for IHT purposes.

There are other vehicles, such as Enterprise Investment Schemes (EISs) and Seed Enterprise Investment Schemes (SEISs), which offer incentives for investing, although these are focused on high-risk companies, so make sure you do your homework and seek professional advice before going down this route.

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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