HMRC has released data on personal and stakeholder pensions which revealed that .3 31.3 billion was contributed to personal pensions in 2019/2020. This is an increase of £ 3.4 billion compared to the contribution of / 27.9 billion in 2018/2019.
The good news is that many of us are saving for retirement বেশির most of the credit has been given to pension auto-enrollment schemes. The bad news is that many pensioners are caught up in annual allowances, carrying significant tax charges. Here’s what you need to know.
What is the current pension annual and lifetime allowance?
The government limits how much money your pensioner can save in a tax year. Exceeding the limit means you have to pay taxes. For the current tax year, the allowance is £ 40,000, but keep in mind that this may change in the future.
There is also a limit to how much you can save in your lifetime. The allowance is currently £ 1,073,100, but this may change in the future.
HMRC revealed that the total value of contributions exceeded the annual allowance in 2019/2020 was £ 950 million. In 2018/2019 it increased to 130 million.
As a result, the total value of the reported charges for exceeding the lifetime allowance in 2019/2020 was £ 342 million. This is an increase of 21% from 28 283 million reported in 2018/2019.
Why are pension savers being caught by the annual allowance?
The most likely reason is the failure to understand the pension allowance system, mainly because many find it complicated.
The basic annual and lifetime allowance limits are quite easy to understand. But things start to get complicated when the pension system includes money purchase annual allowance (MPAA) and tapered allowance.
Enemy example, under the annual allowance of money purchases, if savers access their pension containers and then continue contributing, their annual allowance drops from £ 40,000 to £ 4,000. Without this knowledge, they will probably exceed the limit and carry significant tax charges.
If their ‘threshold income’ is more than £ 200,000 and their ‘adjusted income’ is more than £ 240,000, their one (‘tapered’) annual allowance will also decrease. The Gov.uk website provides a guide to paying your reduced (‘tapered’) annual allowance.
In addition, if the savings in your pension container go above 100% of your earnings, you may incur significant tax charges.
Long and short is that it is easy to take extra charge if you are not in accordance with the extra pension.
What can pensioners do to avoid being caught?
A better understanding of the pension allowance system may be the best opportunity to exceed your annual allowance. It is a good idea to access the ‘Tax on Your Personal Pension Contribution’ resource on the Gov.uk website. And if you find it complicated to understand, you can always seek the help of an independent financial advisor.
Remember that if you go above the annual allowance, you will receive a notice from your pension provider. You can use the pension allowance calculator so that you have gone over the allowance. You can then see what steps you can take to avoid repeating your mistake.
Saving a pension is a responsible way to prepare for your retirement year – don’t let unexpected tax charges undo your good work.
Please note that tax management depends on your personal circumstances and may change in the future. The content of this article is for informational purposes only. It is not the purpose of any kind of tax advice, nor does it constitute it. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decisions.
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