Are you currently saving for a pension?

I know it’s not the most exciting of topics but the reality is that when you stop work and retire, you will no longer have your regular pay slip to rely on.

So an adequate pension provision is vital if you have plans for your retirement and want to maintain a certain standard of living.

There have been many changes to the UK tax rules on saving for a pension and I thought it would be useful to share an update with you all.

So what are the current advantages in UK pensions?

  • Tax relief at the marginal income tax rates on pension contributions of up to £50,000 per year
  • No income tax or capital gains within a pension fund, allowing the fund to grow tax free
  • From the age of 55 you can take 25% of the fund as a lump sum (subject to a maximum of £375,000)
  • Pension funds can usually be transferred free of inheritance tax if the pension holder dies before drawing a pension

Some technical terms:

Annual allowance: the maximum you can put in a pension fund each year that is eligible for tax relief.  Currently (tax year 12-13) £50,000.

Carry forward allowance:  it is possible to carry forward unused annual allowance for the three previous tax years

Lifetime allowance: the maximum value that can accumulate in your pension fund without incurring tax penalties.  Currently £1.8m but due to reduce to £1.5m in 2012-13

How much can you contribute?

Lets take Jane, she made pension contributions of £30,000 in the tax year 2009-10, £20,000 in 2010-11 and £25,000 in 2011-12.  In the current tax year 2012-13 she can contribute:

  • The full £50,000 in the current year
  • Carry forward from 2009-10 of £20,000 (being £50,000 less £30,000)
  • Carry forward from 2010-11 of £30,000
  • Carry forward from 2011-12 of £25,000

A total contribution of £125,000

It is more complicated to calculate the contributions of employees who are members of their company’s defined benefit scheme.  If you need help with these calculations you should contact your accountant or financial adviser.

From 2012 there is a duty on employers to enrol employees in a workplace pension; the employer will be required to make a minimum contribution and the funds will be saved in the National Employment Savings Trust (NEST).  The large employers will be required to met the requirements first and it is expected to be 2015 for employers with less than 50 employees