What a relief for retirement savers without a pension
Retirement savers who have no pension but rely on other investments can still boost their pension by thousands.
One of the big differences between alternative retirement investments, like ISAs and pensions is the pension is enhanced by tax relief.
Many investors worried about government tinkering with pension rules prefer to invest and control their own cash – but lose the tax relief on their contributions.
But they can still boost their savings by 20% or more with single contributions in to a pension just before they retire.
Basic rate taxpayers will pick up an instant 20% pension bonus, while higher rate taxpayers can claim relief at 40% or 50%.
The trick is in the timing.
For example, making two single contributions in to a pension at the end and beginning of the tax year before retirement doubles the contribution limits at the last minute – so paying in £50,000 in March and another £50,000 in April meets the limits, providing the annual lifetime allowance is not breached.
For a 20% taxpayer, that £100,000 becomes £120,000 – and 25% of the fund is available as a tax-free lump sum on retirement at age 55 or over.
For couples, any savings exceeding the contribution limit for one pension scheme can be paid in to the partner’s scheme.
The strategy can give a retirement saver the best of both worlds.
Savers have their pension cash available to draw on until just before giving up work and the option to invest in higher return funds. This is the control many over 55s want and why so many workers shun pensions as a savings vehicle.
Then, the last-minute switch plays the pension rules to a retirement savers maximum advantage.
Setting up a last minute pension also works well for ex pats just before they move permanently abroad as transfers from UK to offshore pensions are made with full tax relief on contributions, adding a significant amount to cash in the bank or an ISA.