Rishi Sunak grilled on plans for pensioners in Commons
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Pension saving is geared towards securing a comfortable retirement, but it may not be as easy as it seems. In fact, there are a number of tax liabilities to bear in mind, as well as soaring inflation beginning to take hold.
Thankfully, there are steps Britons can take to help them achieve the retirement they hope for.
Becky O’Connor, Head of Pensions and Savings at interactive investor, looked at the ways people could reduce their tax bill in the coming year.
For individuals planning their retirement, paying more into a pension could be worthwhile in numerous ways.
Primarily, it could help Britons accelerate faster towards their later life goals, but it could also reduce an income tax bill.
Ms O’Connor explained: “You can contribute up to £40,000 a year into your pension (or up to your annual earnings) and still get tax relief at your marginal rate.
“If you can tighten your belt and put more into your pension via salary sacrifice, this can be a good way of staying below certain thresholds that would trigger higher income tax charges, whether that’s £50,270 or £100,000.”
Britons should also not forget the idea of a carry forward allowance, which allows them to make the most of their annual allowances.
If they did not max out their allowance for the previous three tax years, they will be able to use the unused allowances from years prior now.
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Another useful tip for pension saving is to use ISAs as well as pensions to progress towards one’s goal.
Ms O’Connor said: “If you are well on your way to the Pension Lifetime Allowance limit of just over £1 million, don’t forget that ISAs are good for retirement saving too.
“They don’t come with tax relief on the way in, but you can take income from them free of tax and using them can minimise additional tax charges you would incur through going over your pension lifetime allowance.”
The annual ISA allowance currently stands at a sum of £20,000 for the tax year.
With the cost of living rising, and the “biting chill” of creeping taxes, experts have suggested one ISA technique which could help.
Called Bed and ISA, the idea has been described as a simple one.
It means Britons would sell investments they are holding outside an ISA in order to buy the same investments back within their ISA.
It can shelter people from tax in a legal and efficient way.
However, people should always be aware the value of their investments call fall as well as rise, and they could get back less than they invest.
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Bed and ISA could form a wider part of a spring clean strategy, especially for those who are planning towards their retirement.
Myron Jobson, Senior Personal Finance Analyst at interactive investor, said: “It’s got to be one of the industry’s more bizarre terms, but Bed and ISA transfers are a handy tool – especially if you are counting the pennies more this year.
“It’s a good way to take advantage of any unused ISA allowance. Once in an ISA, those investments will be sheltered from tax.
“Bed and ISAs are the ultimate way to recycle money tax efficiently, allowing you to shift investments held outside of your tax wrapper, if you haven’t managed to fully utilise your ISA allowance this year.
“There might be CGT implications, depending on your circumstances, and it’s also worth watching the clock – ii’s deadline for Bed and ISA instructions is 4.30pm on March 30.
“Remember too that not all investment platforms have been accepting these transfers over the pandemic, so it’s well worth checking with your provider.”
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