Avoid this little-known charge

In this week's blog: Fancy a £17,300 fine? Here’s an easy way to get one…

The usual advice is to make sure you pay enough into your pension…

And of course, making sure you have enough funds to retire on comfortably should always be a top priority.

So, what I’m about to tell you might come as a surprise:

You can put yourself at *RISK* if you put *too much* money into your pension!

Yes, really.

I've been talking a lot about how to tidy up loose ends in preparation for the New Year, and this is definitely one to watch out for.

You might never have realised it, but there are actually multiple limits on how much you can pay into your pension before facing financial penalties.

Let me explain.

First of all, there's a standard annual limit of £40,000 on all pension contributions...

But did you know in 2016, that limit was reduced if your income exceeds £150,000, by the introduction of a tapered annual allowance?

I don’t want to get too technical here, but there is also a lifetime allowance of £1.055 million for the 2019/2020 tax year. That means that any amount that exceeds that total could incur an additional tax charge of up to 55%.

And if you're over 55 and already drawing down potentially taxable income from a personal pension, there are restrictions on how much you can continue to contribute, with a much lower annual limit of £4,000.

Now here’s the important bit.

If you pay in more than your personal limit, you will be charged tax on your excess pension contributions - up to 45%!

That's not good news.

Imagine putting money away all your life for a pension, only to lose a big chunk of it BY MISTAKE because you were "too good" at saving...

What's even more alarming is that this happens much more often than you might think.

In 2017/18, 26,550 people undertaking self-assessment reported pension contributions over their annual limit. 10 years earlier, it was only 230 people. That's a 11,000% increase in a decade!

In total, there were over 37,000 people facing tax penalties for making contributions beyond their limit in 2017/18.

And it’s cost them big!

So far they have paid a total of £173 million in tax penalties, and the sum is still rising as more than two-thirds haven't finished paying yet.

Let that sink in for a moment.

That means that the average tax penalty has been £17,300.

And although the lifetime limit affects far fewer people, the average charge paid by those who breach it is even higher, at approximately £40,600.

I wouldn’t fancy either of those penalties – and I’m sure you don’t either!

Now, you might think that you'd already know if *you* were overpaying pension contributions, but it could happen completely inadvertently, for many reasons. Let’s look at a few very common ones.

>> If you're handling your contributions yourself and don't know all the details of the restrictions...

>> If you have several pensions and add to them in a way that totals more than your limit...

>> If you have more than one employer and they don't know you have another pension elsewhere...

>> If your income suddenly spikes one year, pushing you over the limit without you even noticing….

In short, there are many scenarios in which you might be unaware if you're exceeding your annual allowance limit - and your employer may not know either.

So it's vital to get on top of this issue and make sure you know exactly where you stand.

The key is to speak to an experienced financial adviser who will go through the numbers with you and make sure you're contributing the right amount to your pension - both to maximise your wealth in retirement, and to avoid inadvertently incurring fines.

If you would like to put more towards your pension than your annual allowance permits, there are also other places where you can invest your cash for your future.

We're happy to help you manage your pension contributions – and now, towards the end of the year, is the perfect time to tie up this financial loose end.

Get in touch today, by emailing me directly or contacting one of our offices to be put in touch with your local expert, and let's discuss what will work best for you.

Statements about taxation are based on our understanding of UK law and HM Revenue & Customs practices which are subject to change. The future basis of taxation could change resulting in you having to pay more or less tax.

Posted by Peter Selby

Topics: Pensions, financial planning, Estate planning


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