Bradley Booth, Financial Planner at ARK Financial Planning
The first step I would suggest would be to spend some time digging through all of the documents and getting up-to-date assessments of Mrs. Stuart’s pensions. It’s worth using the government’s pension search service to find old forgotten policies.
This should give Ms Stuart a first idea of how much money she will have in retirement. An income of £20,000 to £25,000 a year in retirement seems tricky, especially considering her retirement plans and the level of income she is used to.
On the face of it, only £2,000 of Ms Stuart’s new annual salary falls into the additional rate tax bracket, meaning she will be liable to pay the top rate of income tax of 45 per cent on that £2,000. However, any additional income she receives on top of her salary will immediately be hit with the 45% tax rate.
It should also be noted that, as Ms Stuart’s salary is over £125,140 a year, she will still lose all of her ‘personal allowance’.
This happens when someone has a total annual income of over £100,000 and, in Ms Stuart’s case, means she essentially pays an effective tax rate of 60% on the income she receives between 100 £000 and £125,140.
Ms Stuart could easily avoid becoming subject to that 60% rate by reducing her annual income to just below the £100,000 threshold. This is easily done by paying a pension contribution to reduce his taxable income.
Given that Ms Stuart would potentially be making a pension contribution of around £52,000 a year, she should consider using the pension ‘carry-over’ allowances, as without it she would be limited to the annual contribution allowance of pension of £40,000 including tax relief. .
Due to Mrs. Stuart’s high income, contributing to the pension plan would enable her to achieve substantial tax savings without having a major impact on her level of income.
The beauty of a pension contribution for someone of Mrs Stuart’s age is that she may be able to access most, if not all, of her pensions from the age of 55 and will be entitled to 25% of this amount tax free.
If Ms. Stuart decides to make a retirement contribution for tax planning purposes, the best place to start would be with her current employer. It’s worth discussing “salary sacrifice” as a way to contribute to the pension plan with your current employer.
This is generally the most tax-efficient way to make pension contributions. This not only saves on income tax, but also on national insurance contributions.