Getting some tax relief on your pension may mean that some of the money that would have normally gone to the government, actually goes into your pension instead. The great thing about this is that you can put as much money as you want into your pension, but there are some limits that you need to be aware of.
If you are a UK taxpayer then the rule is that you will get tax relief on contributions that you make. You can do this for up to 100% of your earnings, up to £40,000. For example, if you happen to earn £20,000 but decide to put £25,000 into your pension pot then you will actually only get tax relief on the £20,000. If you earn £60,000 and want to put this amount into your pension in one year then you will only get tax relief up to the £40,000. Any contributions that you make over this will not mean that you get tax relief and it will be added to your other income. If you carry forward any unused allowance from your previous years on the other hand then you can do this, but only if you were a member of the pension scheme during his time. If you need some help with your pension then TailorMade Pensions may be able to help.
Defined Contribution Scheme
If you have a defined contribution pension and you make the decision to start withdrawing money from it, then the annual allowance will reduce all the way to £4,000 in some instances. The annual allowance is reduced if you have an income which is over £150,000. This does include pension contributions.
If you happen to take money from your defined contribution pension, then this can trigger a much lower annual allowance. This is known as the MPAA, or Money Purchase Annual Allowance. For the year 2020-2021, this is £4,000. Whether or not the MPAA applies will depend on how you access your pension pot and it should be known that there are in fact some complicated rules about this. You will trigger this if you happen to take your entire pension pot as a lump sum or if you take a cash-free lump sum and then put your pension pot into a flexible income product.
If you have absolutely no earnings or if you happen to earn less than £3,600 a year then you can pay into a pension scheme and you can also qualify to have more tax relief added onto your contributions as well. If you earn less than this, then you will need to try and explore other options. If you aren’t sure about your pension pot or if you need some advice then there are so many services out there that can help you out and you would be surprised at how much they can provide you with the guidance you are looking for. Getting professional advice is always a good idea.