WHEN TRANSFERRING INTO A PERSONAL PENSION MAY MAKE SENSE

Following the 8.5% rise in the annual State Pension from 6 April, the redirection of this enhanced income into private pension savings could make sense under certain conditions. The idea of investing one’s State Pension into a personal or Self-Invested Personal Pension (SIPP) might seem at odds with conventional wisdom.

Given its foundational role in providing retirement income and ensuring the financial stability of numerous retirees, diverting funds in this manner could initially appear to be misguided. Yet, there are distinct scenarios where such an investment could provide significant tax benefits, particularly for those who have attained State Pension age but continue to generate additional income.

CONTINUED EMPLOYMENT’S IMPACT ON RETIREMENT PLANNING

Upon reaching the age of 66, individuals are entitled to their State Pension, which currently peaks at £11,502.40 annually. While many may have retired by this point, relying on this sum as their primary or supplemental source of income, there is a growing trend of individuals who do not immediately need these funds due to ongoing employment, whether part-time or full-time.

Based on ONS labor market data, recent findings from the Centre for Ageing Better show that more than one in nine people aged 65 and above remain active within the UK workforce – a statistic that has seen a significant increase since the year 2000 [1]. For these senior workers, the reinvestment of their State Pension – or a corresponding portion of their wages – into a private pension can be an appealing strategy. This approach allows for the enhancement of their retirement reserves and enables them to maintain a comfortable standard of living on their current earnings.

NAVIGATING TAX BENEFITS AND CONTRIBUTIONS

The existing regulations allow for contributions of up to 100% of one’s earnings or £60,000, whichever is less, into a pension scheme each tax year, with the opportunity to receive tax relief on

these amounts. Furthermore, carrying forward any unutilized allowances from the previous three tax years for those whose earnings exceed £60,000 is feasible. This policy remains effective until the age of 75, after which individuals no longer qualify for tax relief on pension contributions.

This method is particularly advantageous for individuals in higher tax brackets as a result of continued employment beyond the State Pension age. By transferring their State Pension into a pension scheme, they can potentially lower their taxable income, thus reducing their tax liability while simultaneously enhancing their future pension reserves.

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Source data:
[1] https://ageing-better.org.uk/news/almost-one-million-more- workers-aged-65-and-above-millennium-new-analysis-reveals

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.