Will you miss out on tax-free cash?
Don't get caught up in Brits' £9 trillion savings shortfall.
According to a report published by the Chartered Insurance Institute (CII) this week, savers in the UK are facing a £9 trillion deficit in their retirement savings.
The CII attributes this shortfall to factors such as long-term care, debt and a lack of awareness about the need to save.
Pensions Minister, Steve Webb, said: ‘The next generation will face a different world, with increasing life expectancy, the decline in final salary schemes and lower annuity rates. They are going to have to take greater responsibility for saving for their retirement.’
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What you can do
Did you know that if you are on a higher tax rate of 40%, you can get 40% tax relief on your pension contributions? Basically, with every £100 contribution you make, it will only cost you £60.
However, this relief is only available to the amount of your income that is taxable at 40%. The balance of any contribution will still get tax relief but at the lower basic rate of 20%.
If you are a basic rate taxpayer you can benefit from pension contributions as well. Basic rate taxpayers get 20% tax relief on contributions.
If you currently don’t pay income tax you are still able to contribute to a pension and benefit for basic rate tax relief of 20%. However, this is only available on the first £2,880 per year – tax relief on this amount will boost your total payment to £3,600.
In addition to the generous tax breaks available to you if you pay into a personal pension you can take up to 25% of your pension pot as a tax-free lump sum from the age of 55.
Pension growth is also exempt from capital gains tax, investment income tax and is a very efficient inheritance tax planning vehicle.
You can receive tax relief on your pension contributions of up to 100% of your earnings each year. Also bear in mind, your investment fund grows tax free.
How it works
With a personal pension your provider will claim tax relief from the government at the basic rate of 20%. If you pay tax at a higher rate, you have to claim further relief on your annual tax return.
If you make contributions through your employer, most will take your pension contributions from your pay slip before tax is deducted. So if you pay tax at the basic rate of 20% or if you are paying a higher rate of tax, you will receive tax relief on your contributions straight away.
However, those of you on a higher rate of tax could be missing out on the additional tax relief. Check with your employer if it will automatically include the additional 20% relief or if you will have to do it on your own.
Government announces radical pensions overhaul
Millions of people could be forced to work longer under new plans for an increase in the state pension age.
The government has announced a new state pension age of 66 from 2020. Under a Green Paper published last month, it could speed up the rise to 67 to as early as 2026.
In addition, a giant overhaul of the pension system could see a flat-rate state pension of £140 a week from 2015.
Currently, the full state pension is £97.65 a week but can be topped up to £132.60 with a pension credit.
The new arrangement will apply to all new pensioners but not existing ones.
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Current arrangements mean those on lower incomes are better off in old age if they decide not to save towards retiring but claim means-tested pension credit instead.
The reforms to the system are designed to make everyone gain from saving for their later years, regardless of their salary as well as simplify the process for pensioners.
Pensions Minister, Steve Webb, said 'the current state pension system is dogged by complexity and confusion, it makes it very difficult to save for retirement and leaves millions of people relying on complicated means-tested support'.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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