By John Lawson
Just because you've retired or have reduced the number of hours you work, doesn’t mean you should stop paying into your pension. The upper age limit for getting tax relief is 75.
It's arguably even more valuable to older people to pay into their pension because they can access the money right away.
For example, John, who is retired and doesn’t pay tax because his income is only £9,000 a year, pays £2,880 into his pension. Tax relief is added, topping up the amount paid into his pension to £3,600. As John is over 55, he can take his pension out immediately – a quarter (£900) is tax-free and the other three-quarters (£2,700) is taxable. However, when John adds the £2,700 onto his other taxable income of £9,000, the total of £11,700 is still less than his personal allowance of £12,500. This means that John can receive the £2,700 without paying tax.
In total, John has paid £2,880 into his pension and immediately withdrawn £3,600, giving him an instant profit of £720.
As an alternative, John could have taken a regular income from the £2,700 or bought a lifetime annuity from an insurance company. This is a great way to top-up pension income, especially for those people who pay no tax on their income.
The tax relief you can get depends on your tax rate
Your tax relief depends on how much you pay in, and your highest marginal rate of income tax. For example, if you are a nil or basic rate taxpayer, for every £100 you put into your pension, you will get £25 tax relief giving a total contribution of £125 – the rate of tax relief works out as 20% (20% of £125 = £25).
Higher and additional rate taxpayers can claim back additional tax relief via self-assessment if they are paying into a personal pension or a group personal pension.
Make sure that you include pension contributions when you file your self-assessment return each year.
If you have a workplace pension, you’re probably already getting tax relief
Most occupational pension schemes deduct contributions from gross earnings. If you are in one of these schemes, you will automatically receive all the tax relief you are due up front. One or two exceptions to this rule, such as the government’s National Employment Savings Trust (Nest), deduct contributions from net earnings just like personal pensions.
If you're unsure how you get tax relief for your workplace pension, ask your employer.
You can pay up to £40,000 into a pension in any tax year
The annual limit for pension contributions within any one tax-year is £40,000. This cap applies to the total of your own contributions and employer contributions paid on your behalf. Within the £40,000 limit, you are allowed to pay personal contributions up to the higher of 100% of your earnings or £3,600 (£2,880 net of basic rate tax relief), so bear this in mind if you do not receive contributions from your employer.
This maximum can be lower if you’ve already taken some of your pension
People aged 55 and over who have accessed their pension flexibly – generally defined as having taken some taxable income - have a lower annual allowance of just £4,000 instead of £40,000. The lower annual allowance does not apply if:
- You only draw out your tax-free lump and not a penny more
- You were already taking ‘capped drawdown’, which you started doing before 6 April 2015
- You bought an annuity with your pension savings rather than taking income withdrawals
- You cashed in your whole pension pot of £10,000 or less as a small lump sum on up to three occasions.