You can pay up to £40,000 each tax year. If you pay more than this then you may face a tax charge. This is across all pensions savings you have and includes payments made by you and your employer or business.
The government boosts your savings by adding tax relief to your contributions. The limit for this is set at your annual earnings or £40,000, whichever is lower. If you aren’t employed or earn under £3,600 annually then the most you can pay into a pension is £2,880 (or £3,600 with the tax relief applied).
There’s also a maximum you can pay into pension savings over your lifetime. This is cleverly entitled the Lifetime Allowance (LTA). This is currently £1,073,100 and applies to all contributions made and the growth on your investments. If your savings go over this amount, then you will potentially pay tax on anything you withdraw above the limit.
This limit has changed over the last 10 years and might change further so it’s worth being aware of it if you think your savings might go over this amount. HMRC offers protections you can put in place, if you’re worried about it then it’s worth speaking to a financial adviser to find out what you can do.
Once you reach 55, there are a number of options available to you.
Firstly, you can leave your pot invested if you’re not ready to start taking any income from your pension. You can also continue to pay into your pension. There are limits, however, if you do decide to take any income from one or more of your personal pensions. This is dependent on the type of policy, and how you withdraw the money.
It could be worth seeking some financial advice if you wish to carry on paying in, after taking a payment from any other pension arrangements you have.
There are several ways you can access your pension savings when you decide to reduce your working hours or retire. You’re able to withdraw the first 25% of your pot without paying tax on it. The other 75% is liable for tax, but the amount deducted will depend on your circumstances at the time. You could take the whole amount as a cash lump sum, take several payments in chunks when you want to or set up regular payments. You could do this either by setting up a flexible drawdown arrangement where some or most of your money is still invested or by buying something called an annuity which will give you a set amount of income for a specific amount of time or for life.
To learn more about your retirement options, head here.
We recommend that you speak with Pension Wise (part of the Money and Pensions Service) to help you understand the tax implications of your options as well as any impact they may have on your entitlement to any state benefits you might be eligible for. You might also want to speak to a financial adviser who can offer you tailored advice after reviewing your finances and recommend the best way to plan for your retirement. You can find one in your local area at unbiased.co.uk. Advisers usually charge for their services.