Financial experts say the same pension mistakes happen every March, with savers leaving contributions too late or missing allowances. The tax year ends on April 5. Pension provider Penfold says acting now could significantly boost retirement savings while reducing tax bills. Chris Eastwood, CEO and co-founder of Penfold, said many savers do not realise how much money they are leaving behind.
Most people can receive tax relief on pension contributions up to the amount they earn each year until the age of 75. Failing to use the annual allowance means missing out on free money from the government, experts said. Unused pension allowances from the previous three tax years can be carried forward to the current year. After April 5, any unused allowance from the 2022 to 2023 tax year disappears permanently.
Timing is critical: a payment made on April 4 does not guarantee it will reach the pension provider before midnight on April 5. If a contribution arrives late, it counts towards the next tax year instead, potentially costing savers valuable tax relief.
People earning more than £100,000 face an effective 60 percent tax rate on income between £100,000 and £125,140 due to the gradual removal of the personal allowance. Pension contributions can reduce adjusted net income and restore some of the lost personal allowance for those earning over £100,000, making them a powerful tool for high earners.
Opportunities also exist for non-earners and basic rate taxpayers. Up to £2,880 can be paid into a non-earning partner's or child's pension each year, which HMRC tops up to £3,600. A basic rate taxpayer contributing £800 receives a £200 tax top-up, effectively free money from the government.
Retirees face their own pitfalls. Many over-55s rush to take the full 25% tax-free lump sum from their pension as soon as they retire. Taking the full tax-free lump sum can leave retirees short of income in later life, experts warn. Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said people typically view tax-free cash as a separate pot of money rather than part of overall retirement savings. Two-thirds of over-55s feel confident about deciding when and how to take their tax-free cash, but less confident about generating long-term income from their pot.
Looking ahead, 62 per cent of employees with defined contribution workplace pensions are unaware of pension reforms that will expose retirement savings to inheritance tax from April 2027. The exact details of the reforms remain unclear, but the lack of awareness suggests many could be caught off guard.