5th May 2017

It’s a pity that over time successive governments have made tax and pensions so complicated that we immediately switch off when they are mentioned. But legislation change has put pensions in the spot light and many people will be surprised at the benefits they can bring for all, especially for business owners and higher earners.

I thought it would be worth going over the advantages and some of the new “freedoms” attached to pension savings, as I am constantly surprised at other people’s surprise when I tell them about them.

You get an instant 20% gross up on every contribution you make. This means that if you put £80 into a pension, the government will immediately add another £20, which is in fact an instant 25% return on your money. There isn’t an investment anywhere else in the world that can do that.

  • If you are a 40% tax payer, you will not only get the 20% gross up but you will also be able to claim another 20% tax relief on the full value invested when you make you make your tax return. This means that to get £100 into your pension it has actually only cost you £60. It is crucial you remember to actually claim the additional tax relief. It is estimated that £400m of additional tax relief was lost last year because so many higher and additional rate tax payers forgot to claim it.
  • Companies can pay into a pension on behalf of employees and will receive full corporation tax relief at 19% on the contribution as well as saving on employer NI contribution at 13.8%.
  • You can access the pension at any time once you are 55.
  • You can take up to 25% of the entire value tax free, in any amounts you wish. You do not have to take any income.
  • You can now also take as much income as you like, when you like, although after the 25% tax free lump sum has gone the remaining Drawdown pot is taxable at your marginal rate. So, if you have no other income you will be able to take £11,500 tax free in 2017/18.
  • Your pension stays outside your estate for the purposes of calculating Inheritance Tax (IHT), so it is never included in your total wealth calculation should you die.
  • You can leave the pension to who you wish and to as many people as you wish.
  • If you die before the age of 75 they (your inheritors) will inherit the pension, tax free. If after age 75, they can draw on the inherited pension and will be taxed at their marginal rate (we expect this silly and ageist law to be challenged).
  • Anyone who inherits a pension can in turn leave it to someone else. The pension is in effect a trust that never ends until it is empty.
  • If someone inherits a pension they can keep the money in the new pension where it will grow tax free, just like a massive ISA. Again, it remains outside their estate for the purposes of IHT.
  • There are many more advantages to owning and investing in a pension, which I will go into another time, but probably the most important is that they help you live a more comfortable life when you retire, which is exactly what they are meant to do.
  • Saving into a pension plan literally gives you money for nothing.

NOTE. All advantages listed are given by legislation but is not the case that all providers must deliver the flexibility of all legislation. Please ask your pension provider if they are able to facilitate whichever specific advantage you are interested in.

For more information, please contact David Henderson on 0131 538 7390 or dvh@personalmm.co.uk.

Personal Money Management is the trading name of Professional Money Management Ltd who are directly authorised by the Financial Conduct Authority.