When you plant a tree in the garden, you can’t just leave it to grow on its own if you want it to be healthy. While it might become larger, the branches could get out of control or disease could damage the roots.
Regular pruning can encourage more growth and prevent any problems with the tree. It also helps you shape the branches and foliage so your tree fits in the garden and looks as you want it to.
Your pension is much the same.
If you make regular contributions, your pension pot will likely grow over time. However, if you don’t take an active approach to managing your savings, your pension may not suit your financial goals when you come to access it.
For example, you might need to consider how much you contribute, where your funds are invested, or how much the management fees cost.
This regular pension maintenance could encourage your savings to grow faster and ensure that your pot fits the retirement plan that will help you achieve your desired lifestyle.
It may be useful to review your pension and make any necessary adjustments before 5 April 2024 when the current tax year ends as there are some important allowances that reset.
The end of the tax year can also be a good opportunity to look at your overall retirement plan and ensure you are on the right track.
Read on to learn about five important pension maintenance tasks you could complete before the end of the tax year.
1. Use your Annual Allowance
Several important allowances reset at the beginning of a new tax year on 6 April 2024, including your pension “Annual Allowance”.
This is the amount that you can contribute to your pension each year without triggering an additional tax charge. In the 2023/24 tax year, it stands at £60,000 or 100% of your earnings, whichever is lower.
Your Annual Allowance may also be reduced if you are a high earner or you have flexibly accessed your defined contribution (DC) pension.
You receive tax relief on any contributions that fall within your Annual Allowance, so it may be beneficial to use as much of it as possible.
As we approach the end of the tax year, you may want to check how much of your Annual Allowance you have left and consider increasing your pension contributions if you have not used it all yet.
2. Check for any unused Annual Allowance from previous years
If you have used your full Annual Allowance from the current tax year, HMRC allows you to carry forward your unused Annual Allowance from the past three years. This could increase your allowance for the current tax year, so you can make more tax-efficient contributions to your pension.
However, there are some specific rules that apply here. To carry forward unused Annual Allowance you must:
- Use your full Annual Allowance for the current tax year first
- Be a member of a UK-registered pension scheme in each year from which you want to carry forward your unused Annual Allowance.
Your tax-efficient contributions are also restricted by the Annual Allowance from the tax year in which you want to contribute. For example, the unused Annual Allowance in the 2022/23 tax year was up to £40,000, rather than £60,000 as it is in 2023/24.
Furthermore, your total contributions in the tax year you are adding money to your fund cannot be more than 100% of your earnings, even when carrying forward unused Annual Allowance from previous years.
You can only carry forward unused Annual Allowance from the past three years, and you must use any allowance from the earliest year to the most recent. For example, in 2023/24, you can go back as far as the 2020/21 tax year.
There are some exceptions to the carry forward rule that you may need to be aware of too. The amount you can carry forward may be affected by the Tapered Annual Allowance if you are a high earner. Furthermore, you may not be able to use carry forward if you have flexibly accessed a defined contribution (DC) pension and are subject to the Money Purchase Annual Allowance (MPAA).
As such, you may want to seek professional advice so you don’t accidentally trigger an additional tax charge when carrying forward unused Annual Allowance.
If you do have unused Annual Allowance from the past three years, you do not need to do anything to make use of it. You can simply make the additional contributions to your pension without reporting this to HMRC.
It may be worth checking this before the end of the tax year so you don’t miss a chance to carry over unused Annual Allowance.
3. Review your contributions
The end of the tax year may be a good time to review your pension contributions.
If you are using your full Annual Allowance each year, you likely won’t want to increase your contributions. However, you might find that you still have a lot of your Annual Allowance left over.
This could be more likely after the Annual Allowance increased from £40,000 to £60,000 on 6 April 2023.
Additionally, the Lifetime Allowance (LTA) – the total amount you can contribute to your pension in your lifetime without triggering a tax charge – was effectively removed from 6 April 2023, and will be abolished altogether on 6 April 2024.
As a result, you may be able to make more tax-efficient payments into your pension, so you might want to increase your contributions to take advantage of this.
Additionally, changes to certain tax rules could see your tax bill rise in 2024/25. In this case, increasing your pension contributions might benefit you.
The end of the tax year can be a great opportunity to check allowances and consider what tax you might pay in the future. You might then adjust your pension contributions to ensure you are building adequate retirement savings and being as tax-efficient as possible.
4. Check your annual investment growth
The wealth in your pension is invested on your behalf, potentially generating growth over time. The level of growth that you achieve could have a significant effect on the size of your pension pot and your lifestyle in retirement.
When you enrol in a pension scheme, your provider normally chooses a default fund to invest in. However, you can usually change this if you like and many providers offer different options, each with their own focus and level of risk.
You may be able to check your annual investment growth online, or you could speak with your financial planner or pension provider.
If you find that the average growth is not suitable for your financial plan, you may want to make adjustments so you are more likely to reach your savings goals.
You can also change your preferences to ensure that your pension is invested in a way that aligns with your moral concerns. For example, many providers now offer an ethical or sustainable fund.
5. Meet with a financial planner
You might do some basic pruning and maintenance on a tree in your garden, but there are times when you need a professional tree surgeon to help you manage it, so it thrives.
It might be beneficial to take the same approach to your pension and meet with a financial planner to discuss how you could maximise your savings.
A regular meeting with us gives you an opportunity to review your pension and determine whether you need to take any action before the start of a new tax year. We can also help you make necessary adjustments so you can make as many tax-efficient contributions to your pension as possible.
Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
