Talking pensions

Wherever you are with your retirement savings, don’t be put off from taking action – it’s not too late. There are still steps you can take to boost the income you’ll receive when you retire.

Pensions are a very tax-efficient way to save. If you already have a pension, now would be a good time to talk to us about making a lump sum contribution to boost it, especially as the end of tax year is rapidly approaching, or starting a SIPP to increase your options. You won’t have to draw all your pensions at the same time.

If you’re employed or self-employed, you can contribute up to 100 per cent of the value of your relevant UK earnings (salary and other earnings), up to a maximum of £245,000 for the 2009/10 tax year rising to £255,000 for the tax year 2010/11. Contributions above this annual limit are allowed but will be taxed. You can contribute into any number of pension schemes (personal and/or company) each year.

You’ll receive tax relief on your contributions, so if you are a higher rate tax payer a £20,000 investment would cost just £12,000. Basic rate tax relief is added by the government to all contributions at a rate of 20 per cent.

Higher rate tax payers can claim up to a further 20 per cent tax relief via their tax return. If you earn more than £150,000 you will see the tax relief on your pensions cut from April 2011, tapering from 40 to 20 per cent for those earning more than £180,000. Earners below £130,000 will not be affected. For more details see the article on page 6 entitled ’50 per cent tax rate…Mitigating the impact of the forthcoming rate rise’.

There’s a lifetime limit on the size of your pension pot, which is currently £1.75m in the tax year 2009/10 but rises to £1.8m for the 2010/11 tax year. If your fund exceeds this, you’ll incur tax charges of 55 per cent if the excess benefits are taken as a lump sum and 25 per cent if taken as income. The income will then be subject to income tax at your highest rate.

From 6 April 2010, the age at which you can start drawing your pension rises to 55. If you need to, pension benefits can be deferred until you are up to 75 years old. You may still be able to take your pension before age 55 in certain circumstances, for example if you retire through ill-health.

The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.