Pay into your pension now if you can, particularly if you have a company pension where the bosses add in extra cash. Right now you have a £50,000 limit on the amount you can put in each year but that will go down to £40,000 in April. Here’s why you should put money in now.
- The pension limits
- The new pension limits from April 2014
- Why it’s important to put money away
- What should you do
- Pension alternatives
Currently you can invest up to £50,000 a year into a pension and get tax relief on it (i.e. the government puts in the tax you would have paid on that money). If you managed to put away any more than that per year then you wouldn’t get the tax back.
Not only that, but the total lifetime allowance of money you can have in your pension (or all your pensions added together) is £1.5 million. That means you can only have up to £1.5 million in your pension pot and still get tax relief on it. If you manage to put away more than that (and well done if you do!) you’ll have to find other ways of doing it in a tax-efficient manner (like ISAs, as you can see here).
You can put extra money in if you didn’t use your whole allowance in the last two years but, still, it’s handy to get in as much as you can right now.
As of 6 April 2014 you’ll only be allowed to put up to £40,000 per year into your pension. Also, you’ll only be allowed to have up to £1.25 million in your total pension pot.
Admittedly this isn’t going to affect millions of people. As the Chancellor pointed out in the Autumn Statement in 2012, at least 90% of us put less than £40,000 a year into a pension. Still, it makes it all the more urgent to put extra money in now if you possibly can.
It’s not the end of the world if you don’t have the money now but you know you will have later in the year (maybe you’re getting a bonus or an inheritance later). You can add in any unused pension allowance from the three years previous to April 2014 at that point. Use the HMRC’s pension allowance calculator here to find out what you could still use.
Almost a quarter (22%) of us are putting nothing away at all to help fund our old age and more than half (54%) are failing to save enough, according to Scottish Widows’ eighth annual Pensions Report.
The average retirement income people expect has risen to £24,500, double what an average saver retiring at 65 is actually going to receive which is £13,000.
The total average pension pot is around £150,000 and that would only provide an annual income of £5,700. Add on the state pension and that will mean a grand total of around £13,000 per year.
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You should definitely keep on putting money into your pension, in fact put more than usual in before April if you can, particularly if you are a high earner.
Yes, pensions have had a bad press recently but, seriously, it’s worth putting at least some of your investment money into a pension product because:
- you get tax relief on the money you put in (although you get taxed on the pension you take out when you retire.)
- if you have a company pension your company may put money into it as well which is free money!
- the money is taken out of your hands until you’re at least 55. If you’re the sort of person who could dip into your savings here and there it’s a very good way of saving yourself. You can’t get your mitts on it until you’re ready to retire.
- the pension rules have been greatly improved over the last few years so that they’re much more flexible and, in some cases, more transparent. There are also very good products around such as stakeholder pensions and SIPPs which are generally worth having.
The tax relief you get on pensions means that if you are a basic rate taxpayer (20%) for every 80p you put in your pension the government adds in 20p and if you’re a higher rate taxpayer (40%) for every 60p you put in you get 40p added by the government. If you’re a really high earner and on the 50% tax band you get to share it 50/50 (you put in 50p and so does the government).
If you’re looking to put extra money into pension products (other than adding to a company pension) you can either invest in a stakeholder pension (see how you can do that here) or in a SIPP (Self-Invested Personal Pension).
Also, while you’re at it, find out when you are set to retire, according to the State pension calculations, and whether you have enough National Insurance (NI) contributions to get the full State pension. We’ve got an article here about all the State pension changes that are coming along.
We think it’s a great idea to spread your investments and the best way to do this, once you have started to put some cash into a pension, is to put money into an ISA-wrapped investment.
You can invest up to £11,280 in an ISA this tax year (April-April), of which up to £5,640 can be put into a cash ISA if you really want to, although for long-term investing you’re better off with a stocks and shares ISA.
ISAs are like reverse pensions really: you don’t get tax relief on the money you put in but then you don’t get taxed on the money you take out at the end. With pensions it’s the other way round. Also, the money you put into ISAs is much more flexible. You can take it out whenever you like and do what you like with it.
So it’s worth having some money in a pension and some in stocks and shares-based ISAs. We explain in this ISA article why stocks and shares ISAs are the best for long-term investments.