Martin Lewis on how much you should be putting in your pension
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Pension saving is necessary for retirement, and is often undertaken years in advance of a person leaving the workforce. But aside from the ultimate goal of saving, there are also other “perks” a person can secure along the way. One of these is tax relief, often seen as a mainstay of any pension arrangement.
People will be able to secure tax relief on private pension contributions worth up to 100 percent of annual earnings or £40,000 per year – whichever is the lower sum.
Every time a person contributes to their pension, the Government will do so as well through tax relief.
Everyone is entitled to at least a basic rate of tax relief at 20 percent from the Government, but this could be higher depending on someone’s tax band.
However, many people may not use the full amount of allowance when paying into their pension that they could every year.
As such, they could be missing out on important pension tax relief to boost their pot.
Experts, though, have pointed towards a way Britons can use their money and pension rules to make their pot work for them.
It could be especially beneficial for those who have come into some more money recently.
Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “Have you been lucky enough to get a bonus or inheritance?
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“Don’t forget you can use ‘carry forward’ to contribute more than your annual allowance to a pension in a year.
“This is up to the amount of any unused allowance from the previous three years.
“The annual pension allowance is £40,000 or up to your annual earnings, whichever is lower.
“So being able to potentially fill up your allowance for three years is a really nifty way of getting the most possible tax relief on your pension.
“This is particularly so if you are approaching the age you can access your pension.”
People will only pay tax if they exceed the allowance within a year, but should be aware of what counts towards the allowance.
It applies to all of a person’s private pensions, if they have more than one.
This will include:
- The total amount paid in to a defined contribution scheme in a tax year by a person or anyone else (for example, an employer)
- Any increase in a defined benefit scheme in a tax year
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Those who do exceed the annual allowance will get a statement from their pension provider.
Either the pension provider or the person concerned will have to pay the tax charge, and on time, or risk interest for any late payment.
Individuals will have to fill in the ‘Pension savings tax charges’ section of a Self Assessment tax return to inform HMRC about the tax.
However, savers can still claim tax relief for pension contributions via their Self Assessment tax return even if they are above the annual allowance.
HMRC has said it will not tax a person for going over their annual allowance in a tax year if they have died, or if they retired and took all their pension pots because of serious ill health.
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