The nights are drawing in and Halloween approaches, but could your scares this year come from an unexpected source?
Whether you’re approaching pension age, about to retire, or are managing your money in retirement, be wary of the pension mistakes that could cost you dear and have far-reaching consequences.
Before you carve this year’s pumpkin and settle down to a scary film, be sure you’re doing all you can to avoid these five Halloween howlers.
1. Failing to claim additional tax relief
When you contribute to your pension, the payment you make is topped up by the government through pension tax relief. This is an incentive to save for your future self and is just one way your pension is incredibly tax-efficient.
For a basic-rate taxpayer, a £100 contribution will cost you just £80. The additional £20 (your 20% basic-rate tax) is paid by the government.
As a higher- or additional-rate taxpayer, you’ll receive the basic rate of relief but then claim the extra relief through your self-assessment tax return. By doing so, a £100 contribution will cost you just £60 as a higher-rate taxpayer, and just £55 if you pay the additional rate of tax.
Failing to claim this additional amount could add up to a costly – and scary – mistake with the potential to impact your ability to retire at the age you would like.
A recent Telegraph report has found that four out of five higher-rate taxpayers are failing to claim their additional tax relief, collectively missing out on £810 million in relief every year. Make sure that you aren’t one of them.
2. Accidentally exceeding frozen allowances
In his March Budget, chancellor Rishi Sunak froze several allowances and thresholds, including the Lifetime Allowance (LTA).
Your LTA is the amount you can save into – and later withdraw from – your pension without incurring an LTA charge. Each time you crystallise pension benefits, your withdrawal will be checked against the LTA. Any amount that exceeds the threshold will be subject to a charge of 25% if taken as income, or 55% if you access it as a lump sum.
Although the threshold had been rising in line with the Consumer Price Index (CPI), March’s Budget froze the allowance at £1,073,100. Although this might sound like a large amount, it comprises all of the pensions you hold.
As your fund grows over the next five years, you could get close to the limit so be sure to keep watch and ensure that if you do exceed it, at least it won’t come as a nasty surprise.
3. Failing to understand the Annual Allowance that applies to you
The Annual Allowance
The Annual Allowance is the amount you can save into your pensions each year while still benefiting from tax relief.
For the 2021/22 tax year, this stands at £40,000. Keep an eye on this threshold to avoid any unexpected scares, and to ensure your pension contributions are as tax-efficient as possible.
Also be aware that different allowances can apply in some circumstances, potentially taking your allowance down to a spine-tingling £4,000.
The Tapered Annual Allowance
For the Tapered Annual Allowance to apply, your earnings must exceed a threshold income of £200,000. Your Annual Allowance of £40,000 will then reduce by £1 for every £2 of adjusted income that exceeds £240,000.
Threshold income includes your salary, pensions, and other taxable income, while adjusted income also includes any employer pension contributions.
The reduction only stops when you reach the minimum allowance of £4,000. For the 2021/22 tax year, this equates to an adjusted income of £312,000 a year or more.
The Money Purchase Annual Allowance (MPAA)
Taking certain flexible pension options can trigger the MPAA, reducing your Annual Allowance to just £4,000.
Accidentally triggering the MPAA, especially if you had planned to continue making pension contributions elsewhere, could come as an unwanted surprise. You’ll need to be aware of the retirement options that can trigger the MPAA and be sure to speak to us before you access pension benefits.
4. Making unnecessary pension withdrawals
Taking money out of your pension only when you need it is always the best option. This is especially true in the current climate.
Whether you are accessing tax-free cash without a plan to spend it or withdrawing the same regular income each month regardless of whether you need it, excess withdrawals are likely to be held in cash.
The money you withdraw is no longer invested and therefore stands no chance of increasing in value. Not only that, but with savings rates at historic lows and inflation on the rise, the money you withdraw is likely to be losing value in real terms.
Be sure to avoid this scary mistake all year round by keeping an eye on the amounts you withdraw and only taking lump sums that are earmarked for a specific purpose.
5. Not taking financial advice
At Globe IFA, our team of expert financial advisors can help you whether you are saving for retirement, at retirement, or already well into your retirement. And each stage comes with unique challenges.
You might be:
- Worried about the size of the pension pot you are accumulating and fear it won’t provide your desired lifestyle in retirement
- At retirement age but struggling to decide on the right pension option for you
- Well into your retirement but finding it difficult to manage pension withdrawals while keeping enough money back to fund potential later-life care or leave the inheritance you want to provide to loved ones.
We can give you financial expert advice, individual to you and based on your unique circumstances, whatever stage you are at, so get in touch now.
Get in touch
If you would like to avoid these, or any other scary pension mistakes this Halloween, we are here to help. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
