Tax year-end: Power up your pension pot

Planning for your retirement is something that can be so easy to put off and worry about later – after all, there’s plenty of time to deal with that, right? Wrong!

Even though some days you won’t be able to imagine hanging up your work hat, one day you’ll be ready for that retirement party and will be looking forward to a comfortable, rewarding retirement. And this is something that takes careful financial planning.

‘Modern’ retirement is about making sure you’ve got plenty of options to achieve the retirement you imagine – i.e. living later life the way you want to, not the way dictated by your retirement income.

That’s why it really pays to use your tax allowances and reliefs each year to boost your pension pot and lay some solid foundations for your financial future.

So, how can you make your pensions work smarter for you?

Manage your expectations

When thinking about how you can make sure your pension is working smartly to help you meet your retirement goals, remember that your expectations when you first took out your pension may no longer add up, and your portfolio of underlying investments may have since changed.

The turbulence of the past couple of years has made many people rethink their long-term life plans. There’s therefore no time like the present to ensure your investment strategy is in the best shape possible.

Buying yourself some choices

After spending many years working hard, everyone deserves to have the best retirement possible. Each person’s pension savings and goals will be different, everyone’s planning begins with understanding what savings you have and whether you’re getting the best from it.

What does retirement mean to you? Perhaps you want to spend more time doing things you love or seeing family. Maybe you want to go travelling, move somewhere new or even move abroad.

Whatever your dreams, retirement takes a lot of planning. Tony Clark, Senior Propositions Manager at St. James’s Place, commented:

“Saving enough in a tax-efficient way helps to buy you plenty of life choices. You want to look at pensions and ISAs, of course, as well as other products with varying degrees of risk and tax efficiencies.”

Step by step

Coming up to tax year-end is a good time to think about making any changes, in order to power-up your pension. Here are five points for consideration:

1. Start saving into a pension as soon as you can – every little counts.
2. Aim to maximise your annual allowance, depending on your circumstances.
3. Carry forward unused pension allowances, if your earnings support this.
4. Pay into a pension to bring your taxable income down.
5. Review your investments to see if they still meet your needs.

Take a good look at your current financial landscape, and make sure your money and assets are working as tax-efficiently as possible.

One of the best ways to boost your pension pot before tax-year end is to use your full pension annual allowance if you can. In 2022/23, this is still 100% of your salary or £40,000 – whichever is lower.

ISAs and pensions – the ‘dream team’?  

Pensions and ISAs are often referred to as the bedrock of retirement planning. You’ll almost certainly have ISAs and pensions as one of your main sources of income in retirement. Since both of them can help shelter you from tax on dividends, interest and profits, using them well can help make your money go much further.

As well as using your full pension annual allowance, if you can, use your full £20,000 tax-efficient ISA allowance, too. Remember that the ISA annual allowance is a ‘use-it-or-lose-it’ one. But with pensions, you can carry forward any unused allowance from the last three years.

Looking further

A good retirement plan will typically include a variety of different assets, with pensions and ISAs used alongside other forms of investment. If you make a profit from selling assets outside your ISA or pension, the annual Capital Gains Tax (CGT) exemption is still £12,300. However, it’s reducing to £6,000 in 2023/24 and again to £3,000 in the 2024/25 tax year. You can’t carry this allowance over, so it’s another ‘use-it-or-lose-it’ tax break. Use the full allowance if you can.

If you’ve already used up your ISA allowance, there’s still the Personal Savings Allowance (PSA), which can help save tax. You can earn interest of up to £1,000 this tax year if you pay Income Tax at the basic rate. This drops to £500 per year for higher-rate taxpayers, and additional-rate taxpayers can’t claim at all.

Think about any dividends you earn, too. Dividends earned from investments held in ISAs and pensions are tax-free. You can also earn up to £2,000 before you pay tax if the dividends are outside those wrappers. The dividend allowance is then dropping to £1,000 in the 2023/24 tax year and again to £500 in the 2024/25 tax year. Despite numerous announcements and subsequent reversals, the dividend tax rates will remain unchanged between the 2022/23 and 2023/24 tax years.

At the time of writing, the Dividend Tax for basic-rate taxpayers in 2022/23 will stay at 8.75%, and for higher-rate taxpayers, it will be held at 33.75%. For additional-rate payers, it will remain at 39.35%.

Taking control

Feeling confident that you’ll be able to achieve the retirement you imagine is all about planning ahead to make sure you’ve got the retirement income to make it happen.

Everyone’s needs are different, and understanding the various investment vehicles, the possible tax implications and how they work as part of your wider financial plans is crucial. That’s why this is an area where financial advice is invaluable. Clark concludes:

“There are lots of ways to achieve what you want, and an adviser will help you understand the most tax-efficient way of getting there, such as the decisions you need to make, the allowances you can use and the best order in which to use them.”

Contact us today

Here at Wellesley, it’s our job to help you keep on top of changes and give you a heads-up on the tax allowances that can help you achieve the future you imagine in later life.

Don’t hesitate to get in touch on 01444 244551 or info@wellesleywa.co.uk before 5^th April 2023. In the meantime, take a look at our tax year-end checklist to kick-start your planning and power-up your pension pot!

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 and are generally dependent on individual circumstances.

SJP Approved: 20/02/23