Top ten pension tips for 2012/2013

Our top ten pension tips rundown for the tax year 2012/2013.

Couple working on pension finances

1. Tax relief

Pension contributions qualify for tax relief at your marginal rate of income tax up to an annual allowance of £50,000. At a basic tax rate of 20%, this means for every £100 you want to save, you only pay £80 – the £20 is then topped up by HMRC. This makes pension contributions a very tax efficient investment.

2. Maximise your pension contributions

From April 2013 the highest rate of tax will be 45p. If you are a high earner with an annual income above £150,000 and paying income tax at 50%, you should consider maximising your pension contributions before the 50% tax rate is removed (subject to your annual allowance).

3. Maximise your family’s pension contributions

If you have maximised your own pension contributions, you should consider making a contribution to your partner’s pension. Contributions up to £3,600 gross will qualify for tax relief at the basic rate of 20% (see 1 above).

4. 60% effective tax relief

If your income is between £100,000 and £116,210, you can get tax relief on pension contributions at an effective rate of up to 60%. This is because your personal allowance is reduced by £1 for every £2 of income above £100,000. Not only would you get tax relief at 40%, you would also receive back your annual personal allowance, currently £8,105 per annum.

5. Avoid capital gains tax

Once cash is contributed into a pension there is no capital gains tax to pay on any gains within the fund.

6. Flexible drawdown

If you are over 55 and already receiving £20,000 of secure pension income a year (in addition to your drawdown plan), you can now withdraw unlimited income from your pension. You must be already receiving the income; it cannot be based on future income. If you want to take advantage of flexible drawdown you will not be able to make a pension contribution in the tax year in which you move into flexible drawdown or in any subsequent year (without a tax charge applying).

7. Inheritance tax exemption

If you are making a pension contribution for a child or spouse, these may qualify for an inheritance tax exemption. This may help with your estate planning.

8. Carry forward rules

If you have unused annual allowance from the past three tax years, you may be able to use it this year, increasing your £50,000 allowance. This means you may be able to contribute up to £200,000 to your pension this year (£50,000 carried forward from the past three years, plus £50,000 for 2012/2013).

9. Planning ahead

If you want to take advantage of the carry forward rules, you need to ensure you have your pension in place before the end of the tax year. You cannot carry forward your unused allowance if you did not have a pension in place prior to the start of the tax year.

10. Lifetime allowance

The cap on the total value of all your pensions (lifetime allowance) for 2012/2013 is £1.5 million. You should closely monitor your pensions because if you breach your lifetime allowance, the excess value becomes subject to a lifetime allowance charge.

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