Use your ‘nuclear option’ to sink Hunt’s income and inheritance tax raid while you can | Personal Finance | Finance
The nuclear weapon in question is your pension, which can be used to shift huge chunks of your wealth out of the taxman’s clutches, in a completely legal way.
Better still, you will top of your retirement savings at the same time.
Pension benefits are now so generous that I’ve even questioned whether Hunt has gone too far in helping people use them to save tax.
In his recent Budget, he scrapped the pensions lifetime allowance, which capped how much pension people could build during their lifetimes.
Then he lifted the pension annual allowance from £40,000 to £60,000, allowing higher earners to pump in even more money.
Pension contributions bring so many benefits it’s almost impossible to count them all. Cutting your income tax bill is one of the biggest as thresholds remain frozen until 2028.
There are just a handful of days before the current financial year ends but that still gives time to put your pension to work.
A host of tax allowances expire on April 5 but your pension offers some of the biggest savings of all, says Tom Selby, head of retirement policy at AJ Bell.
One of the biggest benefits of saving in a pension is that you get upfront tax relief, which immediately boosts the value of your fund.
If you pay £80 into a personal pension, that will lift your contribution to £100. Higher-rate taxpayers can claim back an extra 20 percent on their tax return and additional rate taxpayers 25 percent.
Workplace pensions should be further boosted by a matching contribution from your employer, which can double your money once tax relief is added, too.
Better still, from age 55 you can take 25 percent of your fund tax-free, with the remainder taxed as income.
These three tax breaks make pensions extremely attractive, and your money will grow free of tax while you wait to start drawing it.
Anyone with cash to spare should consider using their available pension allowances before the tax year ends at midnight on Wednesday.
Under the pensions annual allowance, everyone can contribute up to 100 percent of their income into a plan, up to a maximum of £40,000 in the current tax year.
They can also carry forward any unused allowance from the previous three tax years, provided they belonged to a pension scheme in that time, worth up to £120,000.
From April 6, the annual allowance rises to £60,000, giving savers even more scope to squirrel money away tax effectively.
Pension carry forward rules can be particularly useful for business owners or anyone trying to build pension in a hurry.
If self-employed, paying profits into a pension instead of taking them as salary is a great way to lower your tax bill, as you avoid paying income tax and National Insurance on the money, as well as 13.8 percent employer NI.
Now to what some reckon is the best pensions tax break of all.
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Pensions are a great way to reduce your inheritance tax exposure, as the money immediately fall outside your estate when calculating IHT.
Unused pension can be passed to loved ones entirely tax-free if you die before age 75.
If you die after age 75, beneficiaries will pay income tax on any withdrawals, at their marginal tax rate.
Either way, there’s no IHT to worry about.
Pensions now provide a way of passing money down the generations, with the taxman potentially not seeing a penny of it, Selby says.
The pensions lifetime allowance is abolished from April 6, simplifying the pensions system and reducing the risk of incurring a 55 percent tax charge on larger pots.
If you’re at risk of being hit with a lifetime allowance tax charge, wait until April 6 to “crystallise” your pension.
This typically happens when you either take your tax-free cash, enter drawdown, buy an annuity or draw a lump sum direct from your pot.
Once you start making pension withdrawals, the amount you can pay in again is reduced under the money purchase annual allowance (MPAA), designed to stop people from constantly recycling pension to generate tax relief.
This is currently £4,000 but will increase to £10,000 from April 6, giving older workers extra flexibility to build their retirement savings.
The MPAA is still well below the £60,000 annual allowance, though, so bear that in mind before first crystallising any pension as it will limit future contributions.
While doing all of this, remember to keep death benefit nominations up-to-date, to ensure the right people inherit your pot .
You’ve now got just a few days to deploy your pensions nuclear option. Don’t waste them.
Otherwise start planning to use next year’s pension allowances instead.