3 practical ways contributing to your pension could help boost your overall wealth

A pension’s primary function is to help you save towards your retirement, but did you know that it can also help to boost your overall wealth?

The tax rules surrounding pensions mean that it can influence many different parts of your financial plan. Used wisely, your pension could help you to save more tax-efficiently and achieve your long-term goals.

Read on to discover three practical ways contributing to your pension could help you boost your overall wealth by more than the value of the contributions alone.

1. Pension contributions are usually eligible for tax relief at your marginal rate

You may already know that you’ll usually receive tax relief at your marginal rate on the pension contributions you make, provided they are within your Annual Allowance.

Usually, your pension provider will automatically top up your pension with the basic rate of 20% tax relief. If you are a higher- or additional-rate taxpayer, you’ll need to claim the remaining tax relief through self-assessment. You will then receive an Income Tax refund from HMRC, either as a lump sum or through your tax code. 

If you think you may be owed tax relief from previous years, you can claim relief dating back four years. You can do this either by amending a previous tax return or contacting HMRC directly.  

2. Employer-matched contributions could add even more to your pension pot

If you are employed and pay into a workplace pension, you may be eligible for employer-matched contributions. This is another way to boost your pension pot.

If you meet certain eligibility criteria, your employer is obliged to enrol you in their workplace pension and to make contributions on your behalf, if you choose to remain a member of the scheme.

The combined contributions that you and your employer make must be equal to 8% of your total earnings. This usually means that you must contribute 5% of your earnings (including tax relief), and your employer must contribute 3% of your earnings on top of what they pay you.

Some employers choose to offer a higher percentage than the minimum requirement if you match the contributions from your salary. Given that you will usually also receive tax relief on your contributions, it might make sense to take advantage of higher employer pension payments if it is available to you.  

As well as allowing you to contribute more to your pension for retirement, salary sacrifice can be a helpful way to mitigate your Income Tax bill.

By directing some of your pre-tax salary into your pension, you can reduce the level of taxable income you make each year. As such, your Income Tax bill could fall.

This may be particularly helpful if you receive a pay rise that would push you into a higher tax band. However, it’s important to remember that salary sacrifice may not be suitable for everyone. It can also result in your paying less National Insurance and potentially affect other areas of your finances such as mortgage borrowing and protection cover. We recommend consulting your financial planner for guidance. 

Read more: Are you at risk of falling into the 60% tax trap?

3. Your pension could help you to pass on wealth to loved ones tax-efficiently

It’s a little-known fact that your pension pot is usually exempt from Inheritance Tax (IHT) if you pass it on to your beneficiaries. Indeed, Actuarial Post reports that 62% of people didn’t realise that their pension usually sits outside of their estate for IHT purposes.

This means that your pension could be a very tax-efficient way to pass on wealth to your loved ones.

There are a few factors that you need to be aware of if you plan to do this:

• Any money you have accessed or withdrawn from your pension may count as part of your estate for IHT purposes.

• You need to complete an “expression of wish” form to document who you would like to inherit your pension, as this is not covered by your will. This does not guarantee that the individual named will receive your pension, but your provider will take it into account when paying the benefits.

• If you are older than 75 when you pass away, your beneficiaries are likely to need to pay Income Tax on the pension they inherit at their marginal rate.

Get in touch

If you’d like to learn more about how to make the most of your pension, both to save for retirement and for tax efficiency, we can help. Our friendly team of advisers based in Towcester is here to support you in achieving your financial and life goals.

Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

Workplace pensions are regulated by The Pension Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.