annual pension allowance

There are many important aspects of your pension that you need to know if you want to build the best possible pension pot for a comfortable retirement.

Among these essential aspects is your annual pension allowance.

So, what is it? How does it work? And how can you manage it effectively?

These are all questions that will be answered, as we take you through the need-to-know on your annual pension allowance.

To calculate how your allowance can impact your wealth, you can always access a retirement planning tool.

What is the annual pension allowance?

The annual pension allowance is a specific limit on the amount of money you can contribute to your pension tax-free each year.

As of the current 2023/2024 tax year, the allowance is set at £60,000.

How does the annual pension allowance work?

Each year, you’re able to contribute up to £60,000 to your pension without needing to pay Income Tax or Capital Gains Tax (CGT) on your savings. 

If you save up to or under this amount, your money will be sheltered from tax.

If you exceed this amount, the additional savings will not be sheltered from tax and you or your pension provider will need to pay a tax charge on it.

What can you do to manage your allowance better?

If you want to manage your allowance effectively and minimise its impact on your wealth, you can do several things, including:

  • Seek financial advice

A financial adviser can offer you professional guidance on how to contribute to your pension in the best way.

They will be well-versed in how your pension rules work and can help you structure your investments to grow your savings as tax-efficiently as possible.

For instance, they can assess your income and help you determine how much to contribute over the next 5-10 years to build your pension pot efficiently without exposing your finances to large tax charges.

  • Make the most of your allowance each year

It’s also important that you make the most of your annual pension allowance each year. By using the full allowance, you could potentially end up with a pension pot of over £600,000 in just 10 years.

If you need it, you can carry over any unused pension allowance from the last three years, to help make sure you’re using your entire allowance each tax year.

Also, if you’re retirement planning with a partner, by using up both your allowances you’re essentially able to save up to £120,000 tax-free each year.

  • Use a retirement planning tool

A retirement planning tool can be a great way to help you monitor your pension savings and determine the right contributions to make for the future.

By adjusting certain variables, you’ll see how each part could impact your wealth, such as the amount you contribute and at what times you invest.

This can give you a more accurate idea of how you should structure your contributions around your allowance, and help you feel more confident in saving tax efficiently.

Now you know what your annual pension allowance is and how it works, are you more confident in building your wealth effectively for your retirement?

If you have any ideas for how you’d like to grow your savings, speak to a modern wealth manager to help define the right approach for you.

Please note, the value of your investments can go down as well as up.