Four important pension questions to ask at the start of a new tax year
Released On 27th Mar 2024
The 2024/25 tax year begins on 6 April 2024, bringing several changes to tax legislation and pension rules that could affect your financial plan.
This crucial date in the calendar could be a useful opportunity to review your pension and ensure that you are on track to meet your retirement savings goals.
1. Do you know what your Annual Allowance is?
Your “Annual Allowance” is the amount that you can contribute to your pension each year without triggering a tax charge.
In the 2023/24 tax year, your Annual Allowance is £60,000 (or 100% of your earnings, whichever is lower) and will remain at this level in 2024/25.
This is an increase from the start of 2023/24 where it was £40,000. Additionally, the Lifetime Allowance (LTA) charge was removed on the same date and it will be abolished altogether in 2024/25.
As a result, you may be able to make more tax-efficient contributions to your pension than you could in previous years as you automatically receive 20% tax relief on pension contributions that fall within your Annual Allowance. You may also be able to claim more tax relief through self-assessment if you are a higher- or additional-rate taxpayer.
However, if you are a high earner or have flexibly accessed your defined contribution (DC) pension, you may be affected by the Tapered Annual Allowance or the Money Purchase Annual Allowance (MPAA).
If either of these tax rules affects you, your Annual Allowance may be lower, so you won’t be able to make as many tax-efficient contributions to your pension.
It’s important that you understand what your Annual Allowance is for the coming tax year so you can use as much of it as possible and benefit from tax relief, without accidentally triggering a tax charge.
Making larger contributions from the beginning of the tax year could help you ensure you use as much of your Annual Allowance as possible.
If you are unsure what your Annual Allowance is, get in touch with your financial adviser.
2. Could you benefit from changing your contributions?
If you used your full Annual Allowance in the previous tax year, you may not want to increase your pension contributions as you will likely trigger a tax charge if you exceed your Annual Allowance.
If you didn’t use your full Annual Allowance, especially as it increased from £40,000 to £60,000 in April 2024, you might want to consider increasing your pension contributions, so you can maximise the tax relief you receive and build your retirement savings faster.
According to This is Money, a 40-year-old with an annual salary of £30,000, making a 3% pension contribution would have an estimated pension pot of £60,074 at age 67.
If the same person increased their contribution to 4%, their estimated pot would grow to £80,098.
So, even a modest increase in your pension contributions could make a significant difference to your retirement lifestyle.
You may also want to consider the tax you will pay on investments and whether contributing to your pension instead may be beneficial.
For example, the Dividend Allowance and Capital Gains Tax (CGT) Annual Exempt Amount will both halve on 6 April 2024, meaning you could pay more tax on your non-ISA investments.
The beginning of a new tax year may be a good time to consider your various tax allowances and exemptions, and potentially change your pension contributions to ensure you are being as tax-efficient as possible.
3. What investment growth have you seen over the past year?
One of the key benefits of saving in a pension is that the funds are invested on your behalf. This could mean that your pot grows over time and you have more wealth to pay for your lifestyle in retirement.
Your pension provider usually chooses a default fund to invest your savings in, but this may not be the most suitable option for your financial plan.
Many providers offer several fund options, each with their own level of risk and some may also have a specific investment focus. For example, if you are concerned about reducing your carbon footprint, you might opt for a “green” fund that avoids investing in companies that engage in environmentally damaging practices.
At the beginning of the new tax year, you may want to check your investment growth over the last year. You can normally do this online with your pension provider or discuss it with your financial adviser.
You may be confident that your savings are growing enough, and you will be able to draw adequate income to pay for your desired lifestyle in retirement.
In the case that you are unhappy with the level of growth you see, you can move your savings to a different fund that is more closely aligned with your financial goals.
4. Do you need help managing your pensions?
The pension landscape has changed in recent years. For example, the increased Annual Allowance, and the removal of the LTA charge have changed the level of tax-efficient contributions you can make to your pension each year.
We have also seen a period of high inflation and market volatility that could affect your retirement savings so you may want to consider whether working with a financial adviser could help you manage your pensions more effectively.
With professional guidance, you can ensure you are taking full advantage of changes to important allowances, and are able to overcome any potential challenges now and in the future.
Get in touch
If you want to review your pension and prepare for the year ahead, get in touch or email us at advice@milstedlangdon.co.uk.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
