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4 simple steps to setting up your personal pension tax-efficiently

The below is a guest blog post by John Surgenor of Barrington Hamilton, a firm of Independent Financial Advisers. Take it away John!

Barrington Hamilton

If you’re a contractor or you own your own business, you’ll often shoulder the responsibility for ensuring your financial security. That means arranging your own protection, managing your tax affairs, and setting up your pension.

With no workplace pension to fall back on, making personal pension contributions is a popular and tax-efficient way to build up a fund for your future. And, if you operate as a limited company, there are specific tax benefits you can take advantage of.

Read on for a simple guide to setting up a pension, and the many benefits.

Set up a pension

Your first step is to set up a pension that you can make contributions to. Many providers, that specialise in ‘direct to consumer’ offer a low-cost self-invested personal pension (SIPP) that you can manage online or through an app.

SIPPs offer a wide choice of different types of asset classes, and you can normally invest your contributions in a mix of shares, funds, exchange-traded funds (ETFs), and cash.

Start making contributions

One of the key benefits of saving into a pension is that you benefit from tax relief on your contributions. Tax relief is available to 100% of your earnings up to your Annual Allowance which, for most people, is £60,000 (2023/24).

If you make contributions from your personal funds, your pension provider will usually reclaim basic-rate tax relief on your behalf, meaning that each £100 pension contribution only “costs” £80. If you’re a higher- or additional-rate taxpayer, you can claim additional tax relief through self-assessment.

If you are a contractor or operate as a limited company, you have the advantage that your contributions can come directly from your company income (not personal funds).

Pension contributions that you make directly from your company’s income are invested before tax, meaning you save the amount that you would have paid in both Income Tax and Corporation Tax on the contribution.

Additionally, the amount that you can invest directly from your company income is not limited by the amount that you personally earn.

Invest your contributions

As you normally can’t draw from your pension until age 55 (rising to age 57 in 2028), your contributions will likely remain invested for many years or decades.

With your provider likely offering many investment choices, you’ll need to consider how much risk you are prepared to take.

A diversified fund that tracks the performance of hundreds of companies across a range of industries and geographical regions can be a low-cost and hassle-free choice.

Review your contributions regularly

Once or twice a year it’s worth reviewing your contributions to ensure you’re on track to meet your goals.

If your earnings have improved, consider increasing your contributions in tandem. Additionally, you’ll need to ensure that your investments still align with your risk profile.

If you’re not sure, advice can help

If you want to set up a pension and make contributions, but you’re not sure where to start, how much to save, or how to invest, an FCA-authorised financial planner can help.

Additionally, they can also provide holistic advice on all areas of your finances – for example, setting up life insurance through your company to benefit from further Corporation Tax relief.

We can help, so to find out more, please email or call 01403 750297.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is aimed at retail clients based in the UK and information contained in the article is for information only and does not constitute advice.

Barrington Hamilton

Barrington Hamilton Personal Asset Management Limited is an appointed representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority. Barrington Hamilton Personal Asset Management Ltd is entered on the FCA register under reference 496085

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