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Five tips to save maximum money for your pension

The coronavirus crisis has impacted everyone’s finances over the past two years – for better or for worse – and many over-55s have been forced to turn to their pensions to close the income gap.

However, “pulling” out of your pension can come with a hefty tax bill, so it’s important to understand the implications of dipping into your pot.

Whether you’re still paying into your pension, nearing retirement age, or already a retiree, there are some tax pitfalls to avoid.

How to manage your UK pension

1) Familiarize yourself with your eligibility for tax relief

Claire Trott, of wealth advisor St James’s Place, said the first step is to make sure you understand your pension system and how to get tax breaks on it.

Anyone over the age of 22 who is employed and earns £10,000 or more is automatically enrolled in a pension scheme selected or operated by your employer. At least 8 percent of your income is invested for your future. You contribute 4 pc, your employer 3 pc, and 1 pc comes via a government top-up known as a tax break.

If your contributions are paid before you pay taxes, you don’t have to do anything, your system gets the full tax relief. This automatically increases the value of your pension, even before you have factored in investment growth. This is automatically granted in the amount of 20 percent of the amount that flows into your pension.

But if you pay your pension contributions after you’ve paid taxes, such as in a self-invested personal pension — or Sipp — you only get 20 percent by default and have to reclaim any higher or additional tax rates, Ms Trott said.

For example, if you put £80 into a Sipp, that will be increased to £100 regardless of how much income tax you pay, but a higher rate taxpayer could claim a further £20 back, while an additional rate taxpayer could claim £25 extra.

This can be done via a self-assessment tax return or by calling HM Revenue & Customs. It must be carried out every year to ensure that the correct amount of tax credit is granted. You should do this even if you receive an annual compensation fee.

You can reclaim a missing discharge for up to four years.

When markets fall or money is tight, pension contributions can often be one of the first things to stop, but it can be beneficial to contribute in a volatile market thanks to the pound-cost averaging effect. This means that you can use your pension fund money to buy shares at different prices, giving you more bang for your buck on average.

Tom Selby of pension provider AJ Bell said: “The combination of tax breaks, tax-free cash from age 55 and a matching employer contribution makes pensions a hard investment to beat.”

Michelle Gribbin, of pensions consultancy Profile Pensions, said the pandemic has forced many to look for new jobs, potentially with lower salaries.

She said: “You might be tempted to opt out of a pension scheme until you are more financially stable. But it’s likely that if you unsubscribe, you won’t be able to rejoin at a later date.”

Your pension is essentially an extension of your salary, and you wouldn’t turn down a raise. So keep in mind that you may lose contributions from your employer and the government, which are a valuable part of your benefits package.

https://www.telegraph.co.uk/money/consumer-affairs/tips-save-money-pension-pot-errors-tax-bill-uk-2022/ Five tips to save maximum money for your pension

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