5.7.2022 | Tax

Pension planning - state versus private provision

Beatons head of taxation, Andrew Diver, gives an overview of the basics, covering state pension and private provision. 

Last time on Porttalk, we gave an overview of using property and business premises as part of a pension plan.

When times are tight, pensions can become the last thing on the list of priorities, but at
Beatons, we recommend a long-term mindset when it comes to providing for retirement years as well as helping any employees to do the same.

Even if our finances are sound, many of us don’t know enough about pension provisions.

Preparing for a state pension
For most people, a state pension will be a source of provision in their retirement years. We become eligible for a state pension by obtaining qualifying years through paying national insurance.

Most people need to accrue 10 qualifying years of contributions to be eligible for a level of state pension and 35 qualifying years of contributions to receive the full amount of £185.15 per week.

Below are tips on ensuring you are up to date and have good knowledge of your state pension provision:

Tip 1: Always review your state pension record. This is available on your personal tax account at HMRC.

Consider the number of qualifying years you have so far and how many additional years you intend to work for to see whether you will reach the 35 years maximum by the date of your retirement.

Tip 2: Make sure all your qualifying years are recorded. This includes where you were caring for children under the age of 12.

Tip 3: If you haven’t reached the full 35 qualifying years in time, consider having a small self-employment business before claiming your state pension, for example, gardening or dog walking, which, enables you to pay class 2 national insurance which, is a lower rate than voluntary contributions.

Tip 4: Be aware that additional qualifying years in excess of 35 will not increase your entitlement.

Tip 5: To boost your state pension, you can agree to defer receiving it for a year. If so, you will receive an extra £10.70 per week (£195.85 per week), equating to an extra £556.40 a year.

Private pensions
Since April 2012, employers have been required to contribute to employee pension schemes under auto-enrolment.

Many employees will now have a pension fund, and rules have become much more flexible about how this can be accessed.

We recommend that you take appropriate financial advice before investing in pensions.

Tip 1: Sign up for a pension contribution scheme as soon as you’re able. Don’t leave investing in your pension too late, as there are limits on the amounts which can be contributed. There is an annual limit of £40,000, although this is tapered where income (including company pension contributions) exceeds £240,000. Plus, where income exceeds £312,000, the maximum that can be added to a pension scheme is just £4,000.

If you exceed the annual pension allowance, you will have to pay tax to HMRC at your marginal tax rate. This can be as high as 45%.

Tip 2: In relation to tip 1, there is scope to carry forward unused relief from earlier years though this is limited to a three-year carry forward of unused relief. If you have a bumper year of company profits, you might consider using any surplus relief from earlier years to make company pension contributions to reduce corporation tax liabilities.

Tip 3: If your income is over £50,000, make sure you are obtaining the full tax relief on personally paid pension contributions. In some instances, relief is given through a net pay arrangement (reducing your taxable salary) but in others, the contribution is taken out of pay after tax. In these instances, an additional 25% tax relief can be claimed and repaid to you (not the pension fund).

Tip 4: There are also lifetime limits to pension funds. In 2022/23 the lifetime allowance is £1,073,100. Care is needed for those in final salary schemes who can experience significant increases in their pension levels as a result of salary increases. The tax rate on exceeding the lifetime allowance is up to 55%.

Tip 5: Pension funds can be passed on as inheritance if you do not access them. They are effectively inheritance tax-free on death and can be passed to spouses or next of kin (they will be taxable for them when they take money from the pension fund in the same way the original owner is). It can therefore be beneficial to use other investments and capital and where possible leave pension funds to minimise potential inheritance tax liabilities.

If you have any questions regarding the tax implications of pension contributions, please contact Beatons at info@beatonsgroup.co.uk or 01473 659777.