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How To Top Up Your Pension Before the Year End and Avoid a Penalty

The end of the tax year is fast approaching and you’ll want to do all you can to save as much as possible before all the end of year deadlines are upon us. One of your areas of focus should be your pension pot.


This does not constitute advice and advice should be sought in all instances before acting on it.


Retirement may seem far off, with plenty of time to save before it arrives, but it’s wise to take advantage of the time you have to save for the future. It doesn’t hurt that saving into your pension also offers tax relief on contributions and the money that’s growing in your pot.

Each year, the government allows individual taxpayers to save up to £40,000 tax-free. This of course changes depending on how much you earn, as high earners (bringing home between £110,000 and £210,000), will have a much lower allowance (tapered allowance), as little as £10,000 per year.

The rules for people who have already dipped into their pension pot have also changed under the new pension freedoms, so if they want to start saving again, their allowance is limited to £4,000.


Avoid a penalty – pay attention to your savings

Everyone should avoid going over their individual allowance limits. Otherwise, they face a hefty tax penalty, set at their highest rate of income tax.

It might seem like the £1.03 million (£1.055 million from April) lifetime allowance is unreachable once you start saving, but for diligent savers and high earners, like many doctors and dentists, it’s likely that you may hit this goal before you know it.

If you have excellent benefits and your employer matches contributions, you may also be at risk of breaching your limit – either annual or lifetime. Be cautious once you near the limit, as the charge for the surplus of savings is 25% if you take it as income, or 55% if taken as a lump sum.


When exceeding the limit may work for you

Of course, there might be situations where the benefits outweigh the potential penalties. If your employer is sharing the burden with their contributions, it may be worth the risk. Self-employed individuals will have no such luck and should keep a close eye on their allowances.

If you have a defined benefit workplace pension – which involves complicated calculations – you may not even realise you’re at risk of exceeding your limit until after the tax year is over. If that’s the case,

  • check to see if your employer automatically caps their contributions,
  • see if you can take the money that normally would have been allocated to your pension pot as income instead,
  • look at funnelling any surplus contributions to your spouse’s pension pot to avoid penalties.

Alternatives to avoiding fees

If you are at risk of going over your annual allowance, check to see if you’ve previously used your entire allowance in years past. It’s possible to carry forward any unused allowance, for up to three previous tax years. For earners with fluctuating income, this is a handy trick to have up your sleeve.

You could also avoid penalties for going over the lifetime allowance with an income drawdown plan under the new freedom rules. It’s also best to put off the allowance test as much as possible, at least until age 75, to put off the 25% tax charge levied on any excess.


The rules surrounding pension contributions are plentiful and confusing

If you’re unsure if you could be at risk of exceeding your limits, it’s critical to understand exactly how much you’re contributing and how much your savings are growing. Working with a financial advisor helps to alleviate these fears since they take your complete financial circumstances into consideration when advising you.


Looking to effectively manage your pension?
Investments | Financial Planning | Retirement | Save Tax | Protection |

Dental & Medical Financial Services have been helping doctors and dentists to build and protect their wealth, whilst saving tax for over 25 years.
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