Pensions are still the best option to secure stable retirement income. In 2013-2014, Her Majesty’s Revenue and Customs have created great conditions for anyone who wants to save into a pension for retirement, to maximise their tax planning efforts. This is especially boosted by the increase in the personal taxable allowance minimum to £10,500 in 2013-2014. There is also the possibility this figure will rise for 2014-2015 when the Chancellor releases the Offical Budget Statement in March 2014.
Originally written in 2006, the treatment of pension savings for taxation purposes remains true to the idea that anyone can save an unlimited amount into a pension fund.
Employee Pension Schemes and Tax Relief
Employers can make contributions of up to £255,000 a year on your behalf, and you can top up contributions by up to £3,600 per year, or the equivalent of 100% of your salary, and claim tax relief on those payment contributions.
State Pension Arrangements
Everyone in the UK who has a PAYE tax code or tax code reflecting pension entitlement, usually ten years or more of employment National Insurance contributions (Classes 1 to 4), can receive the State Pension. You can claim the state pension from the time of retirement age, and it is paid as a fixed amount each year, in installments (weekly). While the state pension money is not taxed at source, if you earn over the minimum threshold of income, which includes the state pension, of £10,500 (from April 2013 – 2014 allowance), you will have to pay income tax on your earnings.
Planning for Annual Taxable Income of under £10,500 in 2014
If you are retiring for the tax year 2014-15, you will need to carefully arrange your pension income, if you want to avoid paying tax on any amount regarded as income over £10,500. One way of doing so is to continue working, but to be self-employed, whereby you can make deductions towards the cost of your employment, and submit a reduced gross income figure.
Loss of Pension Entitlement (State)
Once your overall retirement income exceeds £25,400 you will not be entitled to the State Pension any more, so be aware that if you are getting close to this figure, you will need to make up the shortfall of approximately £6,000 per annum. You would need to aim for an income to match this amount or improve upon it. To avoid going over this amount of income, you might consider transferring assets, including cash bonds or shares to other members of your family with some room in their own tax allowances.
Claiming State Pension after Retirement
It is worth noting that you don’t have to claim the State Pension when you retire, if your income is going to exceed £25,400. This is a common scenario, as the first few years of retirement could see you well provided for, with prosperous annuities in place and a good amount of savings behind you. Looking ahead, you can still claim the State Pension if your income falls below the £25,400 amount. This can happen if, for example, you require care home treatment, or are met with large medical bills if you’ve fallen ill. You do not have to claim the State Pension immediately, however it is good to know it is available to you if you need it at some point in future (provided you have the tax code entitlement previously mentioned.)