I have recently inherited some money from my late father and would like to put some of that into my pension. I’m self-employed and have a private pension into which I put about £10,000 a year, usually. Can I use my inheritance for that?

Lowestoft Journal: Richard Barker, chartered financial planner with Smith & PinchingRichard Barker, chartered financial planner with Smith & Pinching (Image: Smith & Pinching)

Richard Barker of Smith & Pinching responds:

Essentially, yes you can make a contribution to your pension scheme using inherited money – but there are two key restrictions that you must bear in mind.

Firstly, any contributions you make in a given tax year mustn’t exceed your annual allowance. Your annual allowance will depend on your earnings: it is the lower of your total taxable earnings or £40,000. The good news is that you can carry forward unused annual allowance from the past three tax years, although you must use the current allowance first. The ability to carry forward unused annual allowance may give you the opportunity to make a significant contribution to your pension fund.

There are two scenarios where the annual allowance is reduced: if you are a particularly high earner you may be subject to a tapered annual allowance depending on your earnings, and if you have started taking benefits from your pension, you may be subject to what’s known as the Money Purchase Annual Allowance of just £4,000. Get advice if you think that either scenario may apply to you.

The other restriction on your contributions is the Lifetime Allowance. This is a cap on the total amount that you can hold in your pension savings in your lifetime, including any gains made. The Lifetime Allowance for contributions currently stands at £1,073,100. While this may sound beyond your expectations, it is important to be aware of it. Any pension value over this figure at certain trigger points will be subject to a tax charge.

One significant advantage of investing in your pension is that you will get tax relief on your contributions. This will depend on your tax band.

However, before you make a decision about investing your inheritance, I think that you might benefit from some independent financial planning. This will give you an understanding of what you need to do to meet your goals at every stage of your life and allow you to put together a strategy that delivers what you need.

Any opinions expressed in this article do not constitute advice. A pension is not usually accessible before age 55. The value of an investment and the income from it could go down as well as up. The ultimate return is not guaranteed and you may get back less than you invested. Pension income could be affected by interest rates when you take benefits. Levels, bases and reliefs from taxation may be subject to change.

For more information, please visit www.smith-pinching.co.uk