Here are seven ways to ensure your pensions are tax efficient.
- Review your contributions
If you’re contributing to a UK pension, how much are you paying in and is this the correct amount when taking into consideration the various allowances available?
Take care because maybe you shouldn’t contribute at all if you have valuable Lifetime allowance protections. But with such complex pension rules, it’s worthwhile getting an explanation from an adviser before taking any action, especially if you have earnings in excess of £110,000 a year.
2. Check you aren’t overpaying tax on your pension income
Research from Which? shows HMRC has refunded £402,743,108 in overpaid tax from pension income in just under four years.
A total of 174,260 people have reclaimed overpaid tax on their pension since 2015 and in the last quarter of 2018, the average claim was £2,161.
If you find you have overpaid tax, contact your tax adviser or visit the HMRC website to reclaim it.
3. Decide if you need to access your pension
Almost £23.6 billion has been taken out of pensions since 2015. Generally speaking, money in a pension is exempt from inheritance tax (IHT), so by taking it out of the pension and bringing it into your estate, you’re increasing the amount of your estate that’s subject to IHT.
If you’re planning to use pension money for a particular reason – an expenditure or gift, for example – then it may be more tax efficient to use money currently in your estate instead, reducing its size (and tax liability) in the process.
4. Consider applying for Individual Protection 2016
Individual Protection 2016 (IP16) provides a personal lifetime allowance to the lower of the value of your pension savings at 5 April 2016 and £1.25 million. You can apply if your pension savings were worth more than £1 million at 5 April 2016.
You’re also able to continue contributing to a pension while holding IP16, although any excess of crystallised benefits above your individual protection figure will be subject to an LTA charge.
There’s no application deadline for IP16, but you’ll need to apply before you take your benefits, as you’ll need an HMRC reference number if you want to rely on the protection.
5. Consider applying for Fixed Protection 2016
Fixed Protection 2016 (FP16) allows individuals to fix their Lifetime allowance at £1.25 million and no minimum pension value is required to apply. However, if you hold FP16, no further contributions can be made after 5 April 2016 without losing the protection.
Again, there’s no application deadline for this protection, but you’ll need to apply before you take your benefits, as you’ll need an HMRC reference number if you want to rely on the protection.
6. Understand how your remaining pension fund will be taxed on death
Your age at death determines how your pension death benefits are taxed, with different rules for those aged 75 and above.
It’s important to review your pension death benefits and, where applicable, update the death benefit nomination/expression of wish forms for your pension schemes accordingly. The death benefits available from your pension schemes should be considered as part of your wider estate planning strategy.
7. Take advice from the experts
Advice from Phoenix Waters Wealth Management can help you and your family make the most of your pensions. We can discuss all of the above steps with you and help you achieve your overall financial objectives. We cannot advise you on your personal tax position. If you are unsure, you should seek independent tax advice.
Remember that the information in this article is just a guide, and that tax rules can and do change over time and their effects on you will depend on your individual circumstances.
The value of investments can fall as well as rise. You may get back less than what you originally invested.