What you need to know about pension planning in 2022

When you’re planning for the future and retirement, a pension is a great asset. A private pension enables you to build a tax-free savings pot, while securing your state pension allows for support once you reach retirement age.

While pension planning may seem straightforward – particularly if you have a workplace pension into which your employer makes contributions – there are things which can trip you up. So, what do you need to consider?

State pensions
Your state pension is paid out when you reach retirement age. You need 35 qualifying years to get the full new state pension and at least 10 qualifying years on your National Insurance record to get any state pension. A qualifying year is one which meets the following conditions:

• A year where you have worked and paid National Insurance contributions
• A year where you received National Insurance credits – perhaps due to employment, sickness, or parental leave
• A year where you have paid voluntary National Insurance contributions

If you’re unsure of how many years you have contributed, you can check your record via your HM Revenue and Customs Personal Tax Account online. Additionally, you can call their helpline for assistance.

State pension age is currently 66, with two further increases set out in legislation: a gradual rise to 67 for those born on or after April 1960 and a gradual rise to 68 between 2044 and 2046 for those born on or after April 1977. So, if you enter work at 18, or perhaps after university at around 22 it can be reasonably expected that you’ll clock up at least 10 years (or up to 35 years) without too much effort.

But what if you plan on taking (or have already taken) a career break?

There are several things you can do to ‘make up’ your qualifying years if you are not working, such as claiming child benefits or making voluntary contributions. We recommend seeking advice as the rules surrounding pensions can be complicated.

Private pensions
Most employed people will have a private pension through their employer. It is mandatory for organisations to offer a workplace pension, though employees can opt out if they choose. This is a real benefit for workers, as their employer will also make at least a three per cent contribution under the workplace pension rules based on pre-tax income.

Whether you have a workplace or other private pension, it will grow tax free while you work. Because there are tax benefits to saving in this way, many choose to increase their pension contributions, particularly if they plan on retiring early. However, there are three rules in particular that can remove the tax benefits and even lead to substantial charges if excess contributions are made.

These are:

• Earnings limit – individuals may not contribute more than 100 per cent of their relevant earnings in 12 months or more than the basic amount (£3,600), whichever is higher. ‘Relevant earnings’ includes any money gained from employment, trading or furnished holiday lets for example. This can often cause a problem for those with large property portfolios – rent from owned properties cannot be counted as relevant earnings (unless they meet the furnished holiday conditions). In addition to this, as dividends do not qualify, shareholders who are primarily remunerated by way of dividend may face restrictions due to the earnings limit.
• Annual limit – individuals may not contribute more than £40,000 per year. This includes contributions made by the pension holder, their employer and anything the government may pay in. The annual allowance starts to be tapered once adjusted taxable income is greater than £240,000. There can be substantial charges as well as a loss of the tax benefits if this limit is exceeded. Individuals can ‘bring forward’ some of their annual allowance if it was not used in the previous three years under certain circumstances.
• Lifetime limit – this is the maximum amount which can be held within a pension scheme. Currently this is £1,073,100 – if the value exceeds this then a tax charge will be applied. This amount changed in the 21/22 tax year and is frozen until 2026.

Pensions are a brilliant way to save for the future, limiting your tax liabilities while providing you with financial security. However, fail to plan properly and you could miss out on all the benefits and your pension could even cost you.

Pension planning can be difficult to navigate, but the team at Monahans are here to help. For more information and advice, please get in touch.

Jessica Hunt