Should I invest in my pension scheme?
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Jeremy Woodruff is a Director and Chartered Financial Planner with Smith & Pinching advising on investments.
I’m a higher rate taxpayer and have been building up my private pension scheme for some years now – I’m age 54. I’ve just inherited some money – about £250,000 – from my father and would like to put at least some of that into my pension scheme so that I have plenty to live on when I retire. Do you think that is a good idea or should I stick to normal investments to get maximum growth?
Jeremy Woodruff of Smith & Pinching responds:
The first point to make here is that a pension scheme is a “normal” investment in that you can hold a wide variety of different types of investment asset in it and it has the same growth potential as an investment portfolio held outside the pension framework. Pensions have strong advantages – they are efficient in terms of tax on any growth, for example, and you get tax relief on qualifying contributions you make into your fund. However, there is a note of caution to be sounded here: there are two allowances that you must bear in mind in order to keep your pension savings tax-efficient.
The first allowance is your Annual Allowance. This is the maximum amount that you can put into pension savings in the tax year on which you can claim tax relief. The current Annual Allowance is £40,000. The good news is that if you haven’t used your Annual Allowance fully in the last three years, you can carry the unused portion forward into the current tax year, although you must use the current and most recent allowances first.
The Annual Allowance is reduced under two different scenarios. Firstly, very high earners see it reduced on a tapered basis depending on their level of income. Secondly, it goes down to just £4,000 once you start taking flexible benefits from your fund.
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The second allowance is your Lifetime Allowance (LTA) for pensions. This is the limit of tax privileged funds you can accrue in total across all your pension schemes during your lifetime before an LTA tax charge applies. If you have already built up significant pension savings, or expect to do so before you retire, then you must bear in mind that the standard LTA is currently £1,073,100. If your funds exceed this and you were to then crystallise an amount in excess of the LTA, the excess would be subject to a punitive tax charge. The amount of charge depends on how the benefits are taken.
There are other potential investment opportunities that offer tax-efficiency but again these may also be subject to annual limits and are not suitable in every case.
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I think that you would benefit from independent financial advice so that you can build a plan to use your inheritance to secure your future in a tax-efficient way. An adviser can help you decide, for example, what level of income you want to achieve in retirement and so plan your pension savings accordingly. The adviser can also ensure that you keep within the allowances for each tax year and guide you to building a suitable investment portfolio both within and outside your pension framework.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information please visit www.smith-pinching.co.uk