Features

Sipps: use your pension tax breaks

It makes sense to exploit your Isa allowance, but don’t neglect your pension. Generous upfront tax relief makes occupational or personal schemes an efficient way to save.

938_MW_P36_ISA-Sipps

At this time of year the focus is always on Isas.But it's also important to take advantage of generous tax reliefs on pensions, some of which operate annually, too. Each tax year, pension savers get a new annual allowance. At present, in most cases, this caps your pension contributions (including any made by your employer and the value of tax relief) at £40,000 or the total value of your earnings, if lower.

There are two exceptions to this rule. Firstly, those with earnings of more than £150,000 get a reduced annual allowance, tapered down by £1 for every £2 you earn over this threshold until you reach an income of £210,000; anyone with earnings at this level or above gets an annual allowance of £10,000. Secondly, very low earners, or those with no income at all, still get an annual allowance of £3,600; they can claim basic-rate tax relief on this allowance, so making full use of it costs only £2,880. Make as much use of your annual allowance as possible. The downside to pension saving for many people is that you have to accept your money will be out of reach for some time to come. Pensions can't currently be accessed until you reach the age of 55, and this limit is due to increase over time. Against that, however, pension saving is highly tax-efficient.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

For starters, you get upfront income-tax relief on pension contributions. So a £10,000 contribution costs basic-, higher- and additional-rate taxpayers only £8,000, £6,000 and £5,500 respectively. Then, inside your pension wrapper, your savings grow completely free of tax. Finally, while income from a pension is taxable (unlike income from an Isa), you can take up to 25% of your fund tax-free.

How your employer can help

The alternative, for those who don't have access to a work-based pension scheme, is an individual arrangement such as a personal or stakeholder pension. These plans are availablefrom companies such as life insurers, fund managers and stockbrokers. You're entitled to the same taxreliefs as in an occupational pension scheme, and you invest your money in your choice of funds from the provider's range.

Advertisement
Advertisement - Article continues below

Self-invested personal pensions (Sipps) have become increasingly popular in recent years. Sipps give you more control over the investments you hold in your pension they're sometimes described as DIY pensions. They also make it easier to take advantage of the pensions-freedom reforms introduced in 2015, which enable savers to draw an income directly from their pension funds in retirement, rather than having to buy an income with an annuity plan from an insurance company.

A Sipp will typically give you access to all the funds you might consider for your Isa, including unit trusts, investment trusts and exchange-traded funds (ETFs); you can also trade in individual stocks and shares through your Sipp. It is also possible to use Sipps to invest in a broader range of assets, including commercial property, though not all Sipp providers offer such facilities.

However you choose to invest your contributions, maximising pension savings from an early age is crucial. Note that the annual allowance rules aren't quite as inflexible as the caps on Isas, in that you can carry forward any portion of the allowance you don't use to the next three tax years. In 2018-19, for example, this could extend your annual allowance to £160,000 if you'd made no pension contributions at all in the previous three years.

The only caveat is that a lifetime allowance also applies on pensions. This limits the total value of pension savings including all contributions, tax relief and investment growth you can build up without paying additional tax charges. Currently, the lifetime allowance is £1.03m, with ministers committed to raising it in line with inflation each year.

Our pick of the best Sipps

Best for small and simple

Best for large and simple

Best for more complex products

Best for drawdown

Advertisement

Recommended

Visit/519223/how-can-we-raise-more-money-in-tax
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Visit/518715/what-are-the-biggest-mistakes-investors-make-when-it-comes-to-tax
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Visit/516603/how-tax-has-shaped-the-course-of-human-history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Visit/513684/companies-cut-back-on-their-pensions-bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019

Most Popular

Visit/investments/stockmarkets/600878/coronavirus-pandemic-financial-markets
Stockmarkets

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020
Visit/investments/property/buy-to-let/600849/come-back-buy-to-letters-all-is-forgiven
Buy to let

Come back buy-to-letters, all is forgiven

The government is winning its war against small private buy-to-let landlords. But who benefits?
23 Feb 2020
Visit/economy/600875/money-minute-24-february-house-prices-unemployment-and-corporate-results
Economy

Money Minute 24 February: house prices, unemployment and corporate results

Money Minute: previewing the week's most important economic and financial goings on, including the latest house price, and unemployment figures, and …
24 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019