If you wish to pay in more than your current Annual Allowance and still claim tax relief, you can ‘carry forward’ any unused allowance from the previous 3 years.
You will need to use up your current year’s allowance first, but this could be useful if your earnings vary from year to year, or if you are self-employed for example.
Be careful if you think you are going to exceed your annual allowance. Any excess contribution will be taxed in such a way as to effectively cancel out the tax relief you would have received on the excess amount.
The liability for this falls to the individual, which means that you must declare it through your self-assessment tax return
Increase your pension allowance using Carry forward
‘Carry Forward’ is a way that you can use up any remaining unused annual allowance for the previous three tax years.
Including the current tax year allowance means that you can potentially pay up to £160,000 into your pensions.
Carry Forward can be a really useful way to catch up on your pension contributions, especially if you are self-employed, or perhaps received a bonus, or inheritance in a particular year.
The rules can become more complex depending on your earnings, so it’s best to seek advice.
This is the amount of pension benefits that you can build up without causing a tax charge when you come to draw the benefits at retirement.
The current pension Lifetime Allowance (2021/2022) is £1,073,100.
What does this mean for you?
This figure may seem unattainable right now, but through saving for your pension and investments having the protentional to grow significantly over a long period of time, this could be a very real concern.
Are you a high-end taxpayer? Are you heading towards retirement age? If so, knowing when and how the lifetime allowance is tested is imperative to the status of your pension.
• Lifetime allowance is tested every time you access your pension.
• When you turn 75, the test will be applied whether you are taking any benefits or not.
What if your Pension exceeds the lifetime allowance?
You can build more pension benefits that this, (should that be than?) however, where the Lifetime Allowance is exceeded there is a tax charge of 25% on the excess fund when paid as income, or 55% if withdrawn as a lump sum.
Crystallised funds vs Uncrystallised funds
Uncrystallised funds are a fancy term used to sum up funds from which the client has not taken any benefits. A crystallisation of funds, on the other hand, is when you cash in on your pension and start taking benefits.
Every time you take money from the pension pot, the crystallised value of your pension is measured (also known as ‘tested’) against the lifetime allowance. This establishes how much lifetime allowance has been used up by the crystallised value.
For example .
If you were to crystallise a pension pot worth £100,000, you could take up to £25,000 as a tax-free cash lump sum and the rest will taken as income. The £100,000 will be tested against your lifetime allowance. This uses up to 9.3% of the standard lifetime allowance.
ISAs (Individual Savings Accounts) were first introduced in 1999 and have since become a settled piece of the UK savings landscape. An ISA shelters your money from any further liability to Income Tax or Capital Gains Tax. ISAs are flexible and simple to understand as well, which is why they have proved such a popular way to save and invest.
There are four main types of ISA to choose from:
1. Cash ISAs – a cash only savings account with a bank or building society
2. Stocks and Shares ISAs – a tax-efficient way of investing your money into a wide range of company shares, government or corporate bonds, property or other assets.
3. Innovative Finance ISAs – a higher risk options which involves peer-to-peer lending
4. Lifetime ISAs – a new form of ISA introduced in 2017 to help individuals get on to the property ladder or save for retirement. The Government applies a bonus of 25% to any money saved.
Please note that Lifetime ISAs and Innovative Finance ISAs are not available through St. James’s Place. Access can be provided to a Cash ISA provider.
How much can you invest in your ISA?
Individuals who are 18 or over can invest up to £20,000 in an ISA this tax year.
A Junior ISA (JISA) allowance of £9,000 this tax year is available for those who are under 18.
You cannot carry forward your allowance, so this year’s will be lost if it is not used before 5 April.
Why choose stocks and shares ISA?
Holding wealth in cash is the right thing to do if it’s money you might need in the short term. A potential issue may arise when cash becomes a long-term investment. And that’s the reality for many Cash ISA savers.
If returns on your Cash ISA savings aren’t keeping up with inflation, then your spending power is reducing. With interest rates still near record lows, relying on cash as a key part of your longer-term savings strategy could be putting your future financial security at risk.
Stocks & Shares ISAs can invest in a wide range of assets. These include equities and fixed interest investments, such as corporate and government bonds.
Some investors may be anxious about investing a lump sum and fearful that they will get their timing wrong, particularly during periods of market volatility.
However, even professional investors cannot consistently and successfully time the markets, so taking a long-term view is of paramount importance.
Investing on a regular basis can help reduce the worry of investing at the wrong time, and by drip-feeding your money into the market, you can avoid the worry of investing on one day only to see the price fall the next day.
The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
Transferring an existing ISA
Transferring your Cash ISAs or Stocks & Shares ISAs to St. James’s Place is straightforward, but there are rules to follow to ensure you retain your tax-saving benefits.
If you’ve contributed to an ISA already in this tax year you would need to transfer this tax year’s contributions in full. If you have money invested in an ISA from previous tax years, you can transfer all or part of these savings. If you transfer as cash you’ll be out of the market until the transfer is complete. You won’t lose out if the market falls but your money won’t be subject to any income or growth if the market rises in this period. If you transfer a fixed rate cash ISA before the end of the term, you may have to pay a fee.
If you’re transferring funds from a Stocks and Shares ISA you’ll remain invested until the transfer. You’ll be unable to switch or sell these funds while the market falls or rises during this time.
Please note that your current provider may charge exit fees.
We can help you decide the best course of action by undertaking a review of your current ISA savings and providing expert advice tailored to your individual circumstances.
Finding the right solution
Whether you are looking to open your first ISA or transfer an existing ISA our Advisers are here to help and provide you with expert advice.
There are many different types of pension that you might come across, but the majority typically fall into one of two themes; Defined Contribution (DC), or Defined Benefit (DB). It’s worth understanding the basics of how these work, as it will have an impact on the options available to you, as well as how you plan to access your retirement benefits when you are ready to retire.
Define Benefit Pension
DB pensions are becoming increasingly rare, but they offer valuable benefits for those in the scheme.
They are schemes that run through an employer, where you accrue benefits based on your earnings, length of service and membership in the scheme.
They offer a guaranteed income for life, and usually the option of a tax free cash lump sum. The age at which you can take benefits is set by the scheme and is typically 60 or 65.
The basis on which the benefits are paid might not have the flexibility you are looking for, or fit with your current retirement plans, such as the age at which you want to retire.
Defined Contribution Pension
A DC pension is based on contributions set up by you, or through your employer. They work by paying a known amount of money into a pension, typically monthly, by you or possibly your employer, or both (if applicable).
The pension plan is usually run by a separate pension company, and your contributions are invested into funds (often a collective of equities) that will hopefully grow over time, ready for your retirement.
The amount of pension capital that you eventually have for retirement will depend on how much you’ve paid in, how your pension funds have performed, and any charges applied.
Your pension contributions will receive tax relief from the government (see ‘How does tax relief work?’), which adds a boost to your retirement savings. DC pensions offer a great deal of flexibility once you are eligible to access your savings, but they don’t come with any guarantees.
There are other types of pensions like-
-Self Invested Personal Pension
Have a read of our FAQs to find out more about them.
A Self-Invested Personal Pension, or SIPP, is a flexible type of pension that offers you access to a diverse range of investments, over and above a typical personal pension.
A SIPP is also a type of Defined Contribution (DC) based pension.
Why invest in a SIPP?
SIPPs offer increased flexibility and control with the ability to invest in a wide range of assets. This differentiates a SIPP from a workplace pension as it gives increased control and flexibility over to you. If this is what you are looking for, then speaking to a financial adviser is a good idea to understand what level of investment risk you are prepared to take, especially if considering different assets to invest in.
How does a SIPP work? The basics.
A SIPP works in much the same way as a standard personal pension, in that it is used to build retirement wealth over time, and then after age 55 allows you to draw down on it, with 25% payable tax free.
There are many types of pensions available, and a SIPP provides a great deal of investment flexibility, however this may not be the right choice for everyone. Having a broad range of investment choices can bring complexity, and it’s a good idea to have an understanding of how different investments work.
Its good to know that…
– Tax relief on your SIPP contributions works in the same way as a personal pension
– You can access the benefits from the age of 55
Personal pension or SIPP?
SIPPs can be appealing due to the scope of investment assets they enable you to hold. By comparison to standard personal or stakeholder pensions, this additional investment flexibility often comes at an extra cost. You should consider this carefully if you are unsure whether you will fully utilise your SIPPs capabilities, as you could be paying more for something you might not use to its fullest. To add to the complexity, there are ‘low cost SIPPs’ and ‘full SIPPs’ which offer different levels of flexibility and cost, so it pays to speak to a financial adviser first..
What can a SIPP invest in?
A SIPP allows you to invest in:
-Funds – SIPPs will typically have many hundreds or even thousands of different investment funds and are also likely to have readymade portfolios for different saving purposes.
-Shares – SIPPs usually allow you to buy and hold shares alongside your other investments.
-Bonds – These are listed and traded in a similar way to shares.
-Investment trusts – These are similar to typical investment funds found in a pension, but are usually single company investments that are bought and held in a similar way to shares.
-ETFs – These operate in a similar way to pension investment funds, but are often based on a particular commodity or market.
-Commercial property– You are able to invest into commercial property such as offices and retail parks through specific investment funds designed for this. You are able to invest directly into commercial property, but this brings additional complexity and often necessitates specialised advice.
How do I set up a SIPP?
If you have decided this is the right choice for you, speaking to a financial adviser is the next step. Getting your investment goals right can be a complex process; an IQ&Co financial adviser is the best way of making sure all areas are covered.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Can I find out more about a Self-Employed Pension?
Being self-employed means that it’s likely your income will fluctuate from year to year, and it can be a challenge to save on a regular basis.
Also, depending on whether your business is just starting up, or perhaps already more established, then your cashflow and savings ability will be in very different places.
Most modern pensions allow you to make ad-hoc contributions or regular top ups as you go, and you will still receive tax relief to boost your contributions. Saving into a pension will provide you with a way to fund your retirement, which makes good business sense as we don’t know what the future will hold.
In 1998, 48% of self-employed workers contributed to a private pension, but by 2018 this had fallen to just 16%. This drop has occurred despite self-employed numbers increasing by about a third over that period.1
This means it is essential to make plans for contributing to an individual arrangement in order increase your financial security in retirement.
Self-employed people make up 15.3% of the workforce, it is therefore vital to set up your own personal private pension.2 All employers have a duty to provide workplace pension schemes; currently there is no automatic enrolment process in place for the self employed, so it is therefore down to the individual to start building retirement savings. Private pensions for the self-employed can be easily set up, but speaking to a financial adviser is a vital step to make sure everything fits with your financial goals.
1 Institute For Fiscal Studies, 2020
2 Office For National Statistics, 2020
Top tips for setting up and managing your pension
1. Start as early as you can
2. Start your savings with future goals in mind
3. Contributions can be flexible to suit your earnings
4. Review your plans every year
Why is setting up a self-employed pension important?
If you are self-employed, you cannot join occupational pension schemes, although you will receive the Basic State Pension and Flat Rate State Pension, which came into effect on 6 April 2016 (subject to a sufficient National Insurance record).
This means it is essential to make plans for contributing to an individual arrangement in order increase your financial security in retirement.
An IQ&Co Financial Adviser will be able to help you, not only with your retirement planning, but also how you can think ahead with your business.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
Business exit strategy
For many self employed people, building a business is often seen as a way to create capital value in the future, and form part of a retirement plan.
However, realising the value from your business at the right time can be potentially problematic. Having a business exit strategy in place is worth thinking about, even at an early stage; are you going to sell the business as it is, or hand over to a family member, perhaps retaining an interest and some income?
Exit strategies may involve the referral to a service that is separate and distinct to those offered by St. James’s Place
The State Pension is a regular payment you can get from the government once you reach your State Pension age.
Under the new single tier State Pension you need 35 years’ National Insurance credits to qualify for the full amount. This is five years more than the old basic State Pension.
A ‘workplace pension’ is a Defined Contribution pension plan that is set up through your employer. Although you can set up your own pension, many people start their pension savings through a scheme offered by their employer.
These are often known as ‘workplace or ‘company pensions’, and your employer will automatically enrol you in their scheme, unless you choose to opt out. You should think carefully if you are considering opting out, especially if you don’t have any pension savings.
Not only does being auto enrolled into your workplace pension get you used to saving over the longer term, but your employer will usually take care of much of the administration for you as well.
In addition, your employer will pay into your pension alongside your contributions and may even pay in higher amounts if you contribute more. It is worth asking for details of this from your employer, as this varies depending on each employer’s offering.
You might accumulate several workplace pensions through several different employers as you move through your career. So, it’s wise to regularly check that your pensions are doing as well as you expected, and make sure your investments are still appropriate.
Your workplace pension will work the same way as a personal pension, so you can access your savings from age 55 to take tax free cash, create an income, or withdraw some or all of it.
If you’re not sure about joining your workplace pension, then it’s best to speak to your IQ&Co adviser first.