How Much Can I Invest in My Future with Pension Contributions?
Paying into a pension is more than just saving for the future – it’s an essential investment strategy that sets you up for a comfortable retirement. There are no restrictions on the total amount you can contribute to your pension each year, but there are limits on the total contributions eligible for tax relief. This limit is referred to as your ‘Annual Allowance’.
Understanding The Annual Allowance (2023/24)
For the 2023/24 tax year, the standard Annual Allowance stands at £60,000. This figure encompasses the amount you can contribute to your defined contribution pensions (including your contributions, your employer’s and any other third-party contributors) and still receive tax relief.
On a personal level, the maximum amount you can contribute to a personal pension and receive tax relief is the higher of £3,600 and 100% of your relevant UK earnings, up to a cap of £60,000.
The Annual Allowance also applies to your defined benefit pension, if applicable, but the calculation differs as it’s based on increases in the capital value of the retirement benefits.
When you choose to invest through F G Watts Financial Advisers, the value of your investment is directly linked to the performance of the investment vehicle selected. It’s important to remember that investments can both fall and rise, potentially resulting in receiving less than the original investment amount. Taxation levels and reliefs are subject to change and depend on individual circumstances.
Exceeding Your Annual Allowance
What happens if you want to contribute more to your pension than your Annual Allowance permits? The ‘Carry Forward’ feature allows you to utilise any unused allowance from the previous three years, provided you’ve been a member of a Registered Pension Scheme during those years.
However, exceeding your Annual Allowance can lead to taxation that effectively cancels out the tax relief on the excess amount. This liability falls to the individual, necessitating declaration through a self-assessment tax return.
Utilising Carry Forward
‘Carry Forward’ enables you to maximise your pension contributions using any unused Annual Allowance from the last three tax years. This can potentially allow contributions of up to £180,000 into your pensions.
Especially for those who are self-employed or have received a bonus or inheritance in a particular year, ‘Carry Forward’ can be an effective way to catch up on pension contributions. However, the rules can become complex depending on your earnings, so seeking advice is recommended.