Rising household bills are set to increase going into 2023, while interest rates are set to continue to increase, meaning mortgage repayments will continue to go up. But a financial planner has urged people to be mindful of their pensions and how much they have saved up for retirement.
Carla Morris, a financial planner at wealth manager RBC Brewin Dolphin, said Britons should make it a priority to check on their pensions.
She said: “If checking the value of your pension pot hasn’t been on the to-do list recently, this is the time to do so.
“Understanding how much money you’ve saved up will help you work out whether you’re on track to achieve your retirement ambitions.
“An adviser can offer support by calculating the projected value of your pension at retirement and the amount of annual income this is likely to produce.”
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Pensions are a particularly attractive savings option for the future, as they avoid capital gains tax.
The tax is set to hit tens of thousands of more Britons next year, as the allowance will be halved from next April, from £12,300 to £6,000. The allowance will be halved again in April 2024, reducing to £3,000.
Ms Morris said Britons should consider topping up their pension if there is a “shortfall” between what the amount they want for their retirement and their current savings.
She said: “Pensions are a tax-efficient way of saving for the future because of the tax relief you receive on personal pension contributions.
“A £100 pension contribution costs just £80 if you’re a basic-rate taxpayer, £60 if you’re a higher-rate taxpayer, or £55 if you’re an additional-rate taxpayer.”
Britons have an annual allowance for how much they can put into their pensions each year and avoid paying tax. This is currently £40,000 a year or the equivalent of a person’s total earnings across a year.
The allowance includes the total sum of an individual’s personal contributions, employer contributions, and Government tax relief.
A person who goes above the allowance will get a statement from their pension provider to inform them.
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James Norton, head of financial planners at Vanguard, spoke about how the allowance works. He said: “Under current rules most people can save as much as 100 percent of their income in a pension up to an annual limit of £40,000.
“What is perhaps less well known, though, is that you can also carry forward any unused allowances from the previous three tax years.
“So, technically, it may be possible to put away up to £160,000 in your pension and get back the tax you would have paid on this income.
“Crucially – and this is also important for those who’ve struggled to save money this year – this carry-forward option is only open to you if you’re currently an active member of a registered pension scheme (i.e a defined contribution pension pot, defined benefit pension, or a pension credit membership where you have a share of your ex-partner’s pension).
“If you’re currently not enrolled in a workplace pension scheme, for example, it may be worth thinking about having at least a self-invested personal pension (SIPP), just in case you want to take advantage of this rule in the future.”
The pensions expert also encouraged savers to be aware of the other annual allowances that may affect the funds they put aside for retirement.
Mr Norton said: “Annual allowances are a crucial part of saving for retirement. Whether it be the pension annual allowance, or the annual ISA allowance, these are powerful tools in an investor’s armoury to help achieve investing success.
“Cost is a key factor that erodes investors returns, but those costs do not just relate to the investments and platforms. It relates to tax as well.
“The Government has put in place generous allowances in order to help us save for retirement, so we should make sure we use them.”
Britons can save up to £20,000 into ISAs and avoid paying tax. The four types of ISAs available to savers include cash ISAs, stocks and shares ISAs, innovative finance ISAs and Lifetime ISAs.