Please note that whilst every effort is made to ensure that the information contained within this explanation is correct, these notes are by necessity brief and of a generalised nature. We would provide specific personalised advice prior to finalising any arrangement.
Personal pensions may be suitable if you’re employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement.
You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.
Funds are usually run by financial organisations like insurance companies and unit trust companies.
The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of fund management charges.
Contribution Levels and Tax Relief
The Annual Allowance for pension contributions is £40,000pa from 6 April 2020. This figure includes the total employee, employer, and third-party contributions
However, there are more complicated rules for anyone earning over £110,000pa, and we can provide advice in this area.
Tax relief on personal contributions is given at up to the individual’s highest marginal rate. This means that high-earning individuals can receive up to 45% tax relief on their contributions.
Basic Rate Tax payers
Each pound you contribute to your scheme, the pension provider claims tax back from the government at the basic rate of 20 percent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
Higher Rate Tax payers
If you’re subject to the higher tax rate of 40 percent (up to 45% for additional rate taxpayers), you’ll still get 40% or 45% percent tax relief for any money you put into your pension that is matched by income in the higher or additional rate tax bands. But the way that the money is given back to you is different:
You pay your contributions after deducting 20% tax relief and this 20 percent tax relief is claimed back from HMRC by your pension scheme and added to your plan
It’s up to you to claim back the other 20 percent if you’re a higher rate taxpayer or 25 percent if you’re an additional rate taxpayer on some or all of the contributions when you fill in your annual tax return (higher or additional rate), or by contacting your Tax Office (higher rate only). This tax relief is given to you rather than being added to your pension plan.
Your pension fund will invest the money you save (including the basic rate tax relief amount) in your pension. Your pension fund will benefit from growth and income from its investments and these accumulate free from tax.
Putting Money into Someone Else’s Personal Pension
You can put money into someone else’s personal pension (eg. your spouse/partner, child, etc). You will pay the net amount after deducting 20% tax relief and the pension plan member has tax relief added to their plan at the basic rate. You can’t claim any additional tax relief on your contributions though as the contributions are classed as having been made by the pension plan member (so if they were higher or additional rate taxpayers they could claim some tax back). If they have no earned income, you can pay in up to £2,880 a year (which becomes £3,600 with tax relief). For example, if you put £80 into a spouse or civil partner’s pension scheme, the government would put in £20, so their pension pot would increase to £100. Your tax would remain the same.
Scottish tax allowances and rates may differ. You should consult a financial adviser for more detailed information.
The above taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
LEGAL NOTICE: A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates, and tax legislation. This article is intended to provide a general appreciation of the topic and it is not advice.
For more information please contact Dominion Financial Management on 01829 423140 or email Info@dominionfm.co.uk and we will be happy to assist you.