In this issue, we’ll bring you all the latest news relating to pensions, the interest rate rise by the Bank of England (BoE) and how to prepare for your retirement.
This month’s featured article…6 Reasons to top up your pension
With the end of the 2022/23 tax year edging closer, time is running out to make the most of your tax-free exemptions and allowances before they disappear forever.
Pensions offer so much more than just a source of income once you stop working.
Despite the fact that this is, of course, their primary purpose, they can also assist you and your company in paying less tax, provide your children a head start, and even help you keep vital state benefits.
Maximising your pension reliefs for the 2022–2023 tax year should be at the top of your list of financial goals over the next couple of weeks.
So, from now until the 5th of April, consider the following six reasons to increase your pension:
Pay less income tax:
One of the simplest methods to move you closer to your financial objectives is to save tax.
Anything you contribute to a pension earns income tax reduction at 20% (within certain restrictions). This means that the government will give you £20 in your pension for every £80 you contribute.
The benefits are much greater if you fall into one of the higher income tax groups.
You can use your tax return to get the additional 40% or 45% relief. Some work-place pension schemes allow you to contribute to your pension ‘pre-tax’ via payroll, meaning that you do not need to claim back relief from HMRC yourself, as you would get relief immediately via payroll.
There is plenty of opportunity to save for your future in a tax efficient manner because for the majority of people, the maximum annual pension contribution you (and your employer) can make and still receive tax relief is the lower of £40,000 or 100% of your earnings. From the beginning of the new tax year (23/24), this will increase to £60,000.
However, there are a few circumstances in which your annual allowance can be less.
First, due to something called the tapering annual allowance, if your wages are exceptionally high (care needed on earnings above £200,000 per year), your allowance might be as low as £4,000.
Second, the money purchase yearly allowance may also limit your tax-deductible contribution maximum, which is again £4,000 (rising to £10,000 from next tax year 23/24), if you are retired or semi-retired and have started taking flexible income from your defined contribution/money purchase pensions.
If you choose, you can contribute more, but you won't get a tax break.
Carry forward unused allowances
You may occasionally be able to pay more than £40,000 per year and still qualify for tax relief.
This is as a result of a concept known as carry forward, which could increase your allowance to a staggering £160,000.
If you were a member of a UK-registered pension scheme during this time, carry forward laws allow you to utilise any unused yearly allowances from the preceding three tax years once you have used up the current year’s allowance in full.
It is crucial to seek professional guidance when you are seeking to take advantage of the carry forward rules, as it can be easy to get things wrong.
Danbro Financial Planning can help with all aspects of pensions and contributions, feel free to get in touch if you have any concerns about your pension or contribution allowance, call 01253 600 597 or email us email@example.com.
Avoid the child benefit tax charge
Child benefit is an important source of income for many families, particularly at this time when the cost of living issue is tightening household budgets.
However, you can be required to pay a tax charge if you get child benefit and you or your spouse/partner make more than £50,000.
The charge is comparable to child benefit until annual income exceeds £60,000, wiping it off entirely.
Increasing your pension is one option here, as it can lower your adjusted net income (your total taxable income for the year).
Let's examine an illustration:
Your annual income totals £60,000. Your net adjusted income drops to £50,000 if you contribute a total of £10,000 to pensions, whether they are workplace or private. The High-Income Child Benefit Tax Charge would not be imposed in this case. Families with two kids would save a combined total of £1,885.
Additionally, since you would receive a 40% tax break on the majority of your pension payments and pay a higher tax rate on earnings beyond £50,270, the actual tax savings would be close to 60%.
Save Corporation Tax
Are you the owner or director of a private limited company and will this year's corporation tax bill be painful?
If so, contributing to a pension can boost your retirement savings while simultaneously lowering the amount you have to pay to HMRC.
Because pre-tax business expenses like company pension contributions are recognised as legitimate business expenses, by making a pension contribution, you would reduce your profits and save corporation tax as a result.
Let’s assume you are looking at company profits of £50,000. Your profits drop to £30,000 if the company contributes £20,000 to your pension, which results in a tax savings of £3,800 (£20,000 x 19%).
Additionally, as a director you are not constrained by the 100% rule of earnings; just the £40,000 annual limit is applicable (£60,000 from 23/24), which is advantageous for people who receive dividends instead of a large salary for tax purposes.
The tax savings for the following year may potentially be higher due to the top rate of corporate tax rate's increase to 25% on April 6 2023.
However, it is wise to consult a professional before making business pension payments. For example, an independent financial advisor may ensure that your pension contributions are appropriate, manageable, and structured properly.
Speak to Danbro Financial Planning today if you have any questions or concerns, call 01253 600 597 or email us at firstname.lastname@example.org.
Retain your personal income tax allowance
Only a small percentage of people make more than £100,000 annually. But if you're one of the fortunate few who does, you should be aware of potential tax penalties.
The majority of people receive an income tax allowance, meaning the first £12,570 of income is tax-free. However, if you earn more than £100,000 per annum, this allowance can be cut back on or even eliminated.
You lose £1 of your personal allowance for every £2 you earn beyond £100,000. Therefore, your personal allowance is eliminated if your income reaches £125,140.
However, contributing to a pension can lower your net adjusted income, as mentioned in Point 3.
If you earn £125,000 and contribute £25,000 to a pension, for instance, your taxable income for the year would be £100,000.
This would allow you to reclaim your personal allowance for income tax, giving you an overall tax savings of about 60% as a result of being able to reclaim your personal allowance.
Save for a child’s future
It may seem early to start saving for a child's retirement. The money may not be required for 50 to 60 years.
But starting a pension as early as feasible can have significant advantages, chief among them being the amount of time the money has to grow.
Even though this doesn't include increasing your own pension, you can start a junior SIPP (self-invested personal pension) for a child as soon as they are born. You can contribute up to £2,880 year, which is increased to £3,600 thanks to tax benefits.
You have complete discretion over how to invest your child's savings, whether it be in cash, stocks and shares, or bonds, as the phrase "self-invested" suggests.
It's critical to sound a warning here, though. The money is restricted until the minimum pension age, which is currently 55 but rising to 57 from 2028, as is the case with any pension plan.
This means that the funds cannot be utilised for pressing expenses like a wedding or a down payment on a home.
The value of retirement guidance
As I'm sure many of you have discovered, topping up your pension can occasionally be challenging, whether your goal is to reduce your tax burden or increase your retirement funds.
Here is where expert guidance can be beneficial. A reputable Financial and Wealth Management advisor can proactively identify and advise on measures like the above in order to help you maximise your pension fund and reduce your current tax burden.
If you would like to discuss your financial situation, including pensions, please do not hesitate to get in touch on 01253 600 597 or email email@example.com.
Interest rate rise - how will this affect your money?
To further combat rising inflation the Bank of England (BoE) has recently raised the base rate by 0.5% to 4%. This is the highest the base rate has been since way back in 2008.
The strategy behind the base rate hikes are, according to the BoE, “by raising interest rates we can bring inflation down sooner, and make sure it stays low after that,”.
Simply put the base rate is rising to curb inflation and help bring it down to a manageable and sustainable level.
Whilst it is too early to say with certainty if interest rates have peaked or not, many experts are expecting the base rate to settle between 4.25% and 4.5%.
What Effect Will This Have On My Mortgage?
The effects of the latest rise on your mortgage will depend entirely on what type of mortgage you have, for instance if you are on a fixed rate mortgage then the rise will have no impact upon your repayments.
If you are on a variable rate such as a tracker mortgage then the latest rise can cause an immediate increase in your repayments.
If you are concerned about your current mortgage or acquiring a new one then it is a good idea to speak to a mortgage advisor who will be best placed to advise on what options are available and which ones are most suitable for your circumstances.
*Your home may be repossessed if you do not keep up repayments on your mortgage.
What Effect Will This Have On My Savings
The good news is any savings account should benefit from this announcement as interest rates will rise in line with the base rate set by the BoE. If you are looking to invest in the short term, such as for 2 years then you could find accounts paying 4.5%.
If, however, you are looking to invest for the long-term such as for a pension then you should still consider investing in assets such as stocks and shares which can beat inflation rates and provide a potentially higher return.
In order to achieve your desired goals it is always a good idea to seek advice and guidance from a qualified professional. Danbro Financial Planning can provide you with the expert advice you need to ensure that your investment goals are achieved, so please do get in touch today on 01253 600 597 or book your free appointment here.
How to prepare for retirement at various phases of your life
Retirement planning is a long process, spanning several decades, and as with many long processes the earlier you start the easier it tends to be.
Your retirement plan will have many different stages and as time and circumstances alter you may find that plan being adapted to meet unforeseen or difficult situations. To help with this it is often a good idea to split your plan into different stages.
Stage One – Early planning – ages 18 to 35
Paying into a pension may be the last thing on your mind after beginning your career and with your adult life ahead of you.
Naturally, more immediate financial objectives will take precedence over those decades in the future, such as travelling, paying off student loans, and saving for a down payment on a home.
Not to mention that your ability to save may be constrained because people often earn less in their early years of employment.
Nevertheless, since you have more time for your money to grow when you start a pension when you are young, delaying can be expensive.
Delaying investing until middle age could cost you up to £100,000 in employer pension contributions.
The good news is that you will automatically enrol in your employer's pension plan as soon as you begin working.
According to the legislation, if you pay 5% of your qualifying earnings, your employer is required to match you with 3%.
Making the most of this is essential to building the nest egg you need to live comfortably in later life, as the aforementioned statistics show. It’s also at this time where you’ll feel the biggest advantage from compound growth.
Given the lengthy timescale, it's crucial to choose assets that provide the most possibility for growth when investing your pension, such as stocks and shares.
Even though the value may increase or decrease, you should have enough time to weather the fluctuations.
Stage 2 – The Middle Ground – ages 35 to 50
Once you reach your mid-30s, financial obligations often begin to mount. You can be paying a mortgage and child care costs at the same time.
On the other hand, as your profession progresses, your income should start to rise. Saving money for retirement can have additional advantages in this situation.
Anyone who makes more than £50,270 annually may be eligible to obtain higher rate tax relief on pension contributions.
This implies that you actually pay £60 for every £100 you contribute to a pension. When combined with employer contributions, this is a fantastic chance to boost your savings.
It's crucial to establish a benchmark for where your present funds stand in respect to your ambitions once you reach your mid-forties.
You may have even defined how these goals would actually look, including the amount of money you'll need and the age you want to retire.
Stage 3 – The Final Stretch – ages 50 to your ideal retirement age
Your retirement savings should be your top priority as you pass 50. Now is the perfect time to start moving forward with your objectives.
Try not to freak out if you're worried that your savings plan is running late.
There is still plenty of time for you to change things. Many of your financial obligations should diminish as you pass through this stage; you may be near to paying off your mortgage, and your children should be less financially dependent. Additionally, many people's income peaks around their fifties.
Rising income and decreasing expenses present an ideal opportunity to start saving as much as you can for retirement, especially if you need to play catch up.
Any money in the bank that you're willing to give up access to can be transferred as lump sums into your pension, boosting your savings account.
Your annual allowance is the amount that you can contribute to a pension each year and still obtain upfront tax relief up to 100% of your wages or £40,000, whichever is less (rising to £60,000 from 2023/24 tax year)
Your retirement plans should be solidifying as you approach your target retirement age, with a clear understanding of the last steps required to reach your target income.
When you reach phase four, this will make making decisions simpler.
Don’t forget your state pension! If you have made enough qualifying national insurance contributions over the course of your working life, you are also eligible for a full state pension at age 66 (or 67 starting in 2028). This can definitely make a difference at £185.15 each week. It is worth obtaining a free state pension forecast from www.dwp.go.uk and this will also point out any options that you might have to “fill” any gaps in your record.
Stage 4 – Achieving and Enjoying Retirement
Your goals now change from increasing your wealth to generating income from it. Your major goal should be to make sure you have enough money in retirement to last the remainder of your life.
Deciding how to structure your retirement income can be daunting as there are a number of options with different features, risks, benefits and tax considerations. You may elect for the certainty offered by an annuity, the flexibility offered by a “drawdown” plan or a combination of those. You may also have other investments and assets that could be used as part of your strategy.
Danbro Financial Planning can provide you with the expert advice you need to ensure that your retirement goals are more achievable, so please do get in touch today on 01253 600 597 or book your free appointment here.
On a lighter note...
Will AI affect the investment arena?
With the rise of ChatGPT and other AI platforms it will be interesting to see if these machine learning entities will become further involved in the Financial Planning and Wealth Management markets.
Whilst ChatGPT has already undergone some testing in the financial arena and other forms of AI have begun to make their mark, mostly in the form of chat bots, it will certainly be interesting to see if the rise of AI will affect the financial arena more significantly than it is currently.
The likes of ChatGPT has already been hailed as having the capability to write entire articles in seconds, where it would have taken a human hours and in replacing certain customer service roles with its ability to answer queries via the likes of chat bots. It will be interesting to see if the continued rise of this most recent AI star can reliable replicate the knowledge, experience and human ability to understand and emphasise with clients wishing to effectively manage their wealth.
Watch this space as we may not be back….
Please note: Your capital is at risk. 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.
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. The content of this newsletter is for your general information purposes only and does not constitute advice. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. Please obtain professional advice before entering into any new arrangement. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
Matt Connelly is Danbro’s Digital Marketing Executive and produces regular content, including articles and newsletters for the Danbro Group and our subsidiaries.
His background is in B2B marketing and business growth with a strong focus on optimising software to maximise marketing and sales activities.
Since becoming a dad a couple of years ago, Matt’s other hobbies have had to be side-lined due to having to focus on far more important matters… such as keeping a toddler entertained!