Planning an early retirement? It’s certainly one of the major benefits that come with being an affluent, high-net-worth individual, but planning ahead to ensure that you can enjoy life to the maximum remains essential whatever the size of your bank account.
Whilst you might have a sizable investment portfolio in place to see you through your latter years, there’s a lot to be said for securing a good pension – and high earners in particular need to be aware of how their income and tax band can impact the amount of money they can contribute annually, as well as the amount of tax relief they might later be able to claim.
Here, we take a look at all you need to know to set yourself up for a bright and plentiful future through your pension.
Your contribution
With a private pension, you can make contributions of anywhere up to 100 percent of your annual earnings or up to the yearly allowance of £40,000, depending on which of the two is lowest.
For high earners, however, do bear in mind that there is a limit on the amount of tax relief you can claim; if your adjusted income exceeds £240,000 then you’ll be eligible to a reduced, or ‘tapered’ annual allowance. A tapered annual allowance reduces proportionally according to earnings, with every £3 over £240,000 of your adjusted income decreasing your annual allowance by £1.
Tax relief
So, how exactly does tax relief work? Usually, this comes in the form of government top-ups on any contributions made each year, up to an annual maximum of £40,000 – but this is reduced somewhat for high earners. Nonetheless, it can still provide a welcome boost to your pension overall.
For starters, you’ll be entitled to claim the standard 20 percent tax relief on your contributions, just as all pension holders can – but the remainder depends on which income tax band you fall into. If you’re a higher-rate payer, then you’re eligible for an extra 20 percent, while additional rate taxpayers can claim an additional 25 percent.
Carry forward
Another way you might benefit from tax relief is by carrying forward any unused allowance from the previous three tax years, regardless of whether or not you’re now on a tapered allowance for the current tax year. However, do bear in mind that if you were also on a tapered allowance for any of those three years then the amount you can carry forward will be limited up to that amount.
The lifetime allowance
The lifetime allowance currently stands at £1,073,000 – an amount that is considerably lower than it was a decade ago. Should your pension amount exceed this by the time you are ready to start drawing from the pot, this could incur a fee. To avoid this happening, it’s wise to consult with a financial adviser who specialises in working with high earners to work out the best strategy moving forward to maximise your money.
The next steps
Armed with the right information, you can maximise your pension pay outs later down the line and set yourself up for a highly prosperous future – but as understanding pensions can be more complicated for high earners, it’s wise not to try to go it alone. Be sure to consult a regulated pensions specialist, who will be able to help you determine whether or not you have a tapered allowance and clarify any doubts around allowances and adjusted income. Done right, you could soon be enjoying the benefits and indulging in a slice of the goodness, because let’s face it – life’s too short not to enjoy it.
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