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5 costly pension mistakes to avoid in the next 2 weeks

How to make the most of your pension allowances and tax relief by the 5 April deadline.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Your last chance to make a pension contribution this tax year and secure up to 45% tax relief (46% if you’re a Scottish taxpayer) is Monday 5 April.

That’s only two weeks away.

If you’re thinking of making a pension contribution, make sure you don’t fall for these 5 costly mistakes.

This article isn’t personal advice. You can’t normally access money in a pension until at least 55 (57 from 2028). Pension and tax rules can change, and benefits depend on your circumstances. If you're not sure what's right for your situation, please seek advice.

The value of your investments can go down as well as up, so there’s always the risk that you could get back less than you put in.

1. Don’t miss out on tax relief

Whenever you pay into a pension, you’ll get a top up from the government in the form of tax relief.

Every UK resident under 75 qualifies for basic-rate (20%) tax relief, even children and other non-taxpayers. Anyone who doesn’t have earnings can contribute up to £3,600 (you pay £2,880, the government adds £720 in tax relief).

If you pay higher-rate tax (40%) you can claim up to an additional 20% in tax relief through your tax return or local tax office. Additional-rate taxpayers (45%) can claim back up to an extra 25%. You must pay enough tax at the relevant rate to claim back the full amount.

When tax return season hits, you might be grateful for the extra money you can claim back because of the contributions you make now.

PENSION TAX RELIEF CALCULATOR

GUIDE TO PENSION TAX RELIEF

2. Don’t forget to use unused pension allowances from 2017/18

This can be particularly relevant if you’ve inherited large sums of money, or if you’re a high earner or additional rate taxpayer. A quirky pension rule lets you take advantage of any unused allowance from the previous three tax years – it’s called the carry forward rule.

With an annual allowance of £40,000 for the last four tax years (including this one), this means you could invest up to £160,000 in your pension this tax year. You’d need to pay in £128,000 up front, with the government adding £32,000 in basic rate tax relief to make £160,000 in the pension. If you paid additional-rate tax on all of it, you’d be entitled to £40,000 back as additional tax relief, so a £160,000 pension contribution would effectively cost you £88,000.

To use carry forward, there are two requirements:

  1. You had a pension in each year you wish to carry forward from, whether or not you made a contribution (State Pension doesn’t count).
  2. You have earnings of at least the total amount you’re contributing this tax year. Alternatively, your employer could contribute to your pension.

5 April is your last chance to carry forward any unused allowance from the 2017/18 tax year.

If you don’t use it now, it’ll be lost forever.

PENSION CARRY FORWARD CALCULATOR

Keep in mind that if you’re a higher earner with an ‘adjusted income’ of over £240,000, you might be caught by the tapered annual allowance. This could restrict the amount you’re able to pay in.

3. Don’t forget you can open your own private pension

If you’ve made the decision to make a pension contribution to invest for your retirement (and perhaps reduce your tax liability) that’s great news. The final step is to give your pension every chance of success.

You should always consider paying into your workplace pension first if you have one, especially if this means your employer will increase their contribution. But if you work for yourself or you want to set up your own private pension for more flexibility, it could be worth thinking about a SIPP (Self-Invested Personal Pension).

A SIPP is a type of pension that lets you invest how and where you like. You decide how much to pay in and when, and you can pick investments to match your financial goals.

You need to be comfortable making your own investment decisions though.

DISCOVER THE HL SIPP

4. Don’t let investment decisions delay your pension contribution

Making a pension contribution and securing your allowances and tax relief each tax year doesn’t mean you need to rush into making investment decisions. You can make a pension contribution, secure up to 45% tax relief before the deadline and decide where you want to invest later.

You can hold cash in the HL SIPP while you make your decision. And if you’re looking for inspiration, you could check out our SIPP investment ideas in the meantime.

LATEST SIPP INVESTMENT IDEAS

5. Don’t leave your pension contribution to the last minute

Your last chance to make a pension contribution this tax year is Monday 5 April.

The end of the tax year falls on the Easter Bank Holiday this year. If your bank isn’t open, you might not be able to contact them to resolve any payment issues or authorise a debit card payment. The last working day of the tax year is Thursday 1 April.

Our website and phone lines will be open until late on the 5th but it’s still a good idea not to leave it to the last minute.

You might want to make your pension contribution sooner to leave enough time for any potential issues. Chances are you won’t need to, but it’ll give you a better chance of securing your tax relief before the deadline.

HOW TO MAKE A SIPP CONTRIBUTION NOW


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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