Make the most of pension changes

The new tax year sees some significant changes to the pension rules

Here’s our quick guide on how you can take advantage.

How much you can pay in

Because pensions are such a tax-efficient way to invest, the Government limit how much you can pay in. You can now pay in up to the level of your earnings capped at £60,000 each tax year.

For every £80 you pay in the Government add another £20. If you pay 40% Income Tax (because you have earnings between £50,270 and £125,140) or 45% Income Tax (because you have earnings of £125,140 or more) you can claim back up to another £20 or £25 direct from HMRC.

If you have earnings of more than £60,000 you may be able to pay in more by taking advantage of any unused allowance from the last three tax years. Some will be able to pay in up to £180,000 in the current tax year.      

How much you can build up in your pension

You can now build up unlimited funds in your pensions, without paying any extra tax when you take the money out.

Previously, the amount you could build up across all your pensions, was limited by the ‘lifetime allowance’ of £1,073,100 unless you had registered for ‘lifetime allowance protection’ which gave you a higher allowance but stopped you paying any more money into your pension.

The good news is, even if you previously registered for ‘lifetime allowance protection’ you can now start to pay money into your pension again.  

If you already have a pension with us you can request to make a single payment into your pension plan.      

Inheritance Tax benefits

Anything left in your pension on death is normally free from Inheritance Tax. As you can now build up unlimited amounts in your pension, this will make it easier to shelter wealth from Inheritance Tax, with the added benefit that once you’re over 55 (57 from 2028) you’ll still have access to the funds during your lifetime if needed.

If you die before age 75 your beneficiaries can take money from your pension free of Income Tax. If you die after 75, any money they take will be added to their other income and subject to Income Tax.

Good news for the over 55s

If you’re over 55 and you’ve taken a taxable withdrawal from your pension, the amount you (and your employer) could pay in was limited to £4,000 each tax year. The good news is this limit has now increased to £10,000 allowing you (and /or your employer) to increase the amount paid into your pension.     

High earners

If you have income of more than £200,000 the amount you can pay into pension may be reduced. This is known as the ‘tapered annual allowance’. If your ‘adjusted income’ (broadly your total taxable income plus your employer pension contributions) exceeds £260,000, the amount you can pay into pensions is reduced by £1 for every £2 over £260,000.

Before April’s changes this could reduce the amount you were able to pay in to a minimum of £4,000, the good news is this minimum has now increased to £10,000 meaning high earners can now pay more into their pensions. 

Tax-free cash

Most people will still be able to take 25% of their pension fund as a tax-free lump sum. The maximum you can take across all your pensions will be capped at £268,275 unless you have registered for ‘lifetime allowance protection’ in which case you’ll be able to take 25% of your higher protected amount. The good news is you can start paying into your pension again without losing this benefit.

These changes give the opportunity to make more of your pensions, talk to your NFU Mutual Financial Adviser to find out how.