The contributions you or your employer pay into a pension are exempt from taxation up to certain amounts. Any investment growth of your pension fund is also free of taxation. This means that paying into a pension is an especially tax-efficient way of saving for later life.
Since the Spring Budget 2023, there have been two changes which have improved the tax benefits of pension contributions.
Firstly, the amount you can contribute tax-free to your all your pension pots, (known as the annual allowance), rose sharply from £40,000 to £60,000 for the tax year 2023/2024 and remains at that level for the current tax year.
If you have not used your full allowance in any of the previous three tax years, you can use it to make contributions above £60,000 in the current year.
Secondly, prior to 2023/2024 tax year there was a standard lifetime allowance (LTA), which was a limit on the amount you could hold in pensions schemes whilst still benefitting from tax relief for pension savings. The government removed the LTA in the Spring Budget 2023 and subsequently abolished it from 6 April 2024. The LTA stood at £1,073,100 prior to its abolition. Any pension withdrawals above that amount would have been taxed at up to 55%.
Pensions are a particularly complex area of personal finance and people may benefit from discussing their provisions for retirement with a financial planner. Hartey Wealth Management is a long-established firm providing retirement planning advice in Cheshire and Shropshire.