How much pension will I get?
The most common question when it comes to pensions is “how much pension will I get?”. In this article we look at how to find the answer and discuss maximising tax relief through pension contributions.
In the first instance, you can check your State Pension forecast online using the Government Gateway service available here: https://www.gov.uk/check-state-pension
Notes: You’ll need to prove your identity to view your forecast.
- Signing in with Government Gateway – You’ll have a user ID if you’ve signed up to do things like file your Self Assessment tax return online.
- Sign in with GOV.UK verify – You’ll have an account if you’ve already proved your identity with either Digidentity or Post Office.
- Creating an account – If you do not already have one of these accounts, you can choose whether to use Government Gateway or GOV.UK Verify.
If you also have a private pension, your scheme provider should be able to give you a forecast of what you are likely to receive.
When can I get my pension?
The Government Gateway service will tell you:
- When you can get your pension.
- How much you will receive weekly, monthly and annually.
- How to increase your pension, if you can.
- Your pension forecast is not a guarantee and is based on the current law.
- Is based on your National Insurance record up to the latest tax year.
- Does not include any increase due to inflation.
Pension tax relief
The government rewards those who make additional contributions to their pensions so some of the money that would normally be paid as tax on your earnings, goes into your pension pot, rather than the government.
- Basic-rate taxpayers can claim 20% pension tax relief.
- Higher-rate taxpayers can claim 40% pension tax relief.
- Additional-rate taxpayers can claim 45% pension tax relief.
In terms of how you claim this tax relief will depend on the type of pension you are paying into. It could be via your net pay or ‘relief at source’ and will likely require that higher and additional-rate taxpayers complete a self assessment form.
How much pension do I need?
The second most popular question regarding pensions is how much pension do I need?
This can be a tough question to answer as there are numerous factors to take into consideration. Many do overestimate how much they’ll need to live on in retirement, believing that they will need the equivalent of their current salary.
The reality however is that many of your costs will dramatically reduce due to your mortgage being paid off and no costs of bringing up children or commuting for example. You may therefore may only need half your current salary to maintain your lifestyle.
In a recent study by Which, they estimated that a single pensioner could live comfortably on approximately £19,000 a year. This would equate to a pension pot of £154,700 (assuming it keeps growing at a rate of 3% annually whilst drawing down).
You should however seek advice from a financial planner for a more accurate projection based on your specific circumstances.
Should I top up my pension pot?
It’s always a good idea to review your options and consider topping up your pension as the government is effectively giving you free money for doing so, via tax relief.
Tax year 2021-2022
We are fast approaching the end of another tax year, 5 April 2022. To benefit from tax relief for 2021-22 you will need to make any top-up payment on or before this date.
You should note however that the government puts a limit on the amount of pension contributions on which you can earn tax relief. This is called the pensions annual allowance which has been set at £40,000 for the tax year 2021-22. Any pension payments you make over the £40,000 limit will be subject to income tax at the highest rate you pay.
However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.
This effectively means that if you exceed your allowance 2021-22, you could any unused allowances for 2018-19, 2019-20 and 2020-21.
For 2021-22, if you are obliged to defer contributions until after the end of this tax year, perhaps due to cash flow issues, don’t forget that any unused relief for the tax year 2018-19 will be lost under the three-year carry back rule. If feasible, you may want to consider going the extra mile to fund a top-up before 5 April 2022 to at least utilise your annual allowance for 2021-22 and any unused allowance for 2018-19.
Contributing to your pension via a Limited company
If you’re a director of a limited company, you can contribute pre-taxed company income to your pension pot. In addition, because an employer contribution counts as an allowable business expense, your company will also receive tax relief against corporation tax.
A company director can personally contribute £40,000 or 100% of PAYE income and still get tax relief. Depending on your earnings, you’ll receive tax relief at your highest marginal rate, either 20%, 40% or 45%.
It’s also important to note that employers don’t have to pay National Insurance on pension contributions. With the rate for 2021/22 at 13.8%, you could save up to 13.8% so by contributing directly into your pension rather than paying it as salary.
In summary, your company could save up to 38.8% by paying money directly into your pension rather than paying it in the form of a salary.
If you need some help ensuring your limited company is maximising profits, we can help.