Building up a pension can be one of the best ways to save for the future. Here’s some of the pension benefits currently available in the 2024/25 tax year, and how to prepare your pension for any future announcements or changes.
What is the pension annual allowance?
The annual allowance is the amount you can pay into your pension before being charged tax. It’s currently £60,000 or 100% of your qualifying earnings (whichever is lower).
The annual allowance is tapered for anyone whose threshold income is over £200,000 and adjusted income over £260,000.
The annual allowance is then adjusted down by £1 for every £2 of adjusted income over £260,000. The taper stops at £10,000. If you’ve used all your annual allowance for this tax year, but you didn’t use it all in the previous three tax years, you may be able to carry the remaining amount of any unused allowance forward.
What is the pension tax free lump sum?
One of the most popular perks of pension savings is the ability to take part of your pension tax free.
Currently, you can take 25% of your pension as a single tax free lump, or even as a series of tax-free lump sums, up to a limit of £268,275.
How does pension tax relief work?
Pension tax relief can boost your later life savings. This is because some of the money that would have gone to the government in tax, goes into your pension instead.
The amount of tax relief pension savers get depends on their marginal tax rate, or in other words, their income tax rate.
This is 20% for basic rate taxpayers, with higher and additional rate taxpayers being able to claim a further 20% and 25% on top from HMRC.
Want to find out more about pension tax relief? We’ve got you covered.
Are pensions part of Inheritance Tax?
Your pension is not currently considered an asset as part of your estate so it isn’t subject to Inheritance Tax.
Currently, if you die before age 75, you can pass your pension savings on as a tax-free lump sum (up to £1,073,100) to your beneficiaries. This is known as the Lump Sum and Death Benefit Allowance.
Inheritance tax is only applied when the total value of an estate exceeds £325,000. If your estate does exceed this amount (known as the nil band rate) there won't be any inheritance tax to pay on the first £325,000.
How to plan for potential future pension changes
- It’s always difficult to know whether any changes to pensions will happen sooner than the start of the next tax year. But looking at your pension and any potential benefits available to you now, can help you plan for the future. This might look like upping contributions to workplace pensions or maximising your annual allowance. This can help you prepare for the retirement you want to achieve.
- Knee-jerk reactions tend to fare poorly. Make sure you’re considering all your options before making any sudden moves to your pension or later-life savings.
- Make sure your pension beneficiaries are in place, and know what to expect. This can help you and them have plans in place in case the landscape changes.
Pension jargon feeling a little overwhelming? We’ve got you covered with our Pension Jargon Buster. You’ll find the ABCs of pension lingo in one handy place.
Your pension is designed for later life. When you save into a pension, the value of your investment could fall as well as rise and you could get back less money than you put in. You usually can’t access your pension until age 55 (rising to 57 from 6 April 2028). Tax rules can change and depend on your personal circumstances.
This article can give you helpful tips, but it isn’t financial, or tax advice. If you’re not sure if something is right for you, you should speak to an Independent Financial Adviser.