How to get the most out of pension tax advantages
By Cristian Angeloni, 3 Feb 22
Personal finance experts share 10 tips savers should be aware of
Pensions can be a great way to save for the long term. But the retirement system in its current form can be incredibly complex to navigate.
From several different reliefs to allowances, and changes at nearly every budget, savers can feel overwhelmed when trying to grasp how it all works and fit together.
Adrian Lowery, personal finance expert at Isa and Sipp platform Bestinvest, and Louise Higham, financial planner at Tilney Smith & Williamson, shares 10 tips on the advantages and pitfalls around retirement saving.
Use tax reliefs
“Tax relief boosts the value of your pension pot immediately, so cannot be ignored,” Lowery said.
“It is granted automatically at 20% of the sum going into your pension, while higher-rate taxpayers can claim back an extra 20%, and additional rate taxpayers 25%, whether that is through their annual self-assessment tax return or automatically in their workplace pension.
“If you pay £80 ($108, €96) into a self-invested personal pension (Sipp) or workplace pension, that will be topped up to £100 whatever your marginal or top tax rate.
“Because £20 is the tax that a basic-rate payer would pay on £100, it’s worth noting here that your pot is boosted by 25% – by the 20% tax relief with £20 being a quarter of £80.
“A higher-rate (40%) taxpayer could then claim back another £20, while an additional-rate (45%) taxpayer could claim £25. The higher-rate taxpayer is getting £100 in their pension pot for a net cost of £60 after the tax reliefs. That is effectively a 66.7% return before any investment growth.
“Workplace schemes vary in how they administer this, so some higher-rate taxpayers in company pensions and the majority of Sipp holders will have to take steps to claim back their extra tax relief.”
Click through the slides to see the full gallery.
Tags: Pension
