Boost your pension this year ‘by maximising allowances’ | Personal Finance | Finance

Retirement might seem distant or imminent, but regardless of timing, ensuring your finances are properly prepared for later life is crucial. While the State Pension is available to anyone with a minimum of 10 years of National Insurance Contributions, workplace or private pension schemes are essential for a comfortable retirement.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, offers five key recommendations to enhance your pension savings. She said: “Retirement may feel like it’s a long way away but the quicker you get to grips with it the better. Auto-enrolment has been a game-changer in making sure more people than ever are saving into a pension, but taking a set and forget approach to contributions could see you with less than you expected.

“The latest data from Hargreaves Lansdown’s Savings and Resilience Barometer shows that only 43 per cent of households are on track for an adequate retirement. Taking some simple actions now can make sure you navigate some key pension pitfalls that can make a huge difference for your retirement.”

Don’t forget to refresh contributions

Many people contribute at auto-enrolment levels – while this might be sufficient for some, others could face an unpleasant surprise. Higher earners particularly risk under-saving and may struggle to maintain their accustomed lifestyle upon reaching retirement, reports the Daily Record.

Shifting from a ‘set and forget’ approach to pension contributions is crucial. Establishing a rule to increase your contributions each time you receive a pay rise can be an effective strategy for enhancing your contributions over time.

It’s also worthwhile to check if your employer will match any increase in your contributions. This arrangement, known as an employer match, can significantly boost the amount that goes into your pension pot.

Don’t forget to claim your pension tax relief

As the self-assessment deadline approaches, it’s important to address the issue of unclaimed pension tax relief. Tax relief serves as a major incentive to save for retirement, but not everyone is claiming what they’re entitled to.

Basic rate tax relief is typically added to your contribution automatically, so there’s no need to claim additional relief if your pension operates under a salary sacrifice scheme. However, if you’re a higher or additional rate taxpayer, it’s worth investigating what type of pension you have as you may need to claim the extra 20% or 25% tax relief through self-assessment.

If your pension operates under a net pay arrangement, then the correct tax relief will be applied. This is because your pension contribution is deducted from your salary before income tax is paid, and your scheme reclaims tax relief at your marginal rate of income tax.

However, if your pension operates under the system known as relief at source, you’ll need to claim any additional tax relief. Many private pensions, such as SIPPs, and some workplace pensions function this way, with contributions taken from your post-tax salary.

The employer deducts 80 per cent of the contribution from the employee’s wages and then reclaims the extra 20 per cent from HMRC. This means if you’re eligible for higher rate tax relief, you’ll need to claim it.

Maximise your allowances

The annual allowance is typically set at the lower of £60,000 or your yearly pay. You can contribute up to this limit and enjoy tax relief.

This means a higher rate taxpayer’s £60,000 contribution effectively only costs them £36,000, making it extremely tax efficient. If you have any unused allowances from the previous three years, you can also utilise these through a method known as carry forward, potentially allowing you to contribute up to £220,000 to your SIPP this tax year (provided you earn at least this amount).

However, always verify your annual allowance before making the contribution. If you’re a particularly high earner or have already flexibly accessed your pension, your allowance could be as low as £10,000.

Maximise your loved one’s allowances too

If you’ve exhausted your own allowances, consider contributing to a loved one’s SIPP to bolster their retirement funds. You can contribute up to £2,880 annually to the SIPP of a non-working spouse or child, and they’ll receive a government top-up in the form of tax relief, bringing the contribution to £3,600.

This can significantly aid a spouse or civil partner in filling pension planning gaps, and by contributing to a Junior SIPP, you can give your child’s retirement planning a head start. Even modest contributions can accumulate over time, potentially putting them thousands of pounds ahead of their peers by the time they commence work.

Locate those misplaced pensions

It’s easy to lose sight of pensions from previous employers, which could leave you thousands of pounds poorer in retirement. If you suspect a pension has gone missing, reach out to the government’s Pension Tracing Service.

You’ll need either the name of your employer or pension provider, and they’ll provide contact details so you can inquire if you have a pension with them.

Once you’ve assembled your pensions, it might be sensible to consolidate them. This could save you time, money, and administrative hassle.

However, before proceeding, ensure you’re not subject to any exit fees or forfeiting benefits such as guaranteed annuity rates.