Can I invest an inheritance in my personal pension?
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I’m a higher rate taxpayer and am age 56. I want to make a large contribution to my pension scheme this year as I have managed to free up some money – mostly because we inherited enough from my father who died this year and so were able to pay off our mortgage. With what’s left of the inheritance and my surplus cash I have £45,000 to put aside. Can I put it in my pension?
Phil Beck of Smith & Pinching responds:
The first point to make here is that most UK taxpayers have an annual allowance for pension contributions of £40,000 that applies to total pension contributions made in the tax year (employer, your own and any third-party contributions). If this limit is exceeded, an income tax charge applies to the excess.
In addition to the annual allowance limit, your own personal contributions will only receive tax relief up to 100pc of your earnings or £3,600 if more. This means that you may not be able to use the whole £45,000 as a contribution in the current tax year, especially if you have been making regular contributions throughout the year. However, it may be possible to carry unused annual allowance forward from the previous three tax years, although the current year’s allowance must be used first, and provided you have sufficient earnings to cover this contribution and any others you will be making this tax year.
The annual allowance is reduced for particularly high earners and for those who have already started taking flexible benefits from their pension fund.
There is another allowance to consider: the Lifetime Allowance for pensions is the total amount you can hold in pension savings in your lifetime. There are punitive tax charges levied on anything over the allowance when it is assessed at important trigger points such as when you start to take benefits. The Lifetime Allowance is currently £1,073,100. If your pension savings may top this figure at some point, I strongly recommend that you get advice now, so that you can plan accordingly.
Your actual question was whether you should put your additional contribution into your scheme. Frankly, subject to the limits described above, the sooner you put it in the scheme, the sooner it can begin to work for you and help towards achieving your retirement goals, although of course growth cannot be guaranteed. When you make your contribution, it will automatically get tax relief at the basic rate, although you may need to claim the additional tax from your higher rate portion through your self-assessment tax return. It’s important to ensure that your pension investments are suitable for you, so I suggest you review your pension portfolio regularly with an independent financial adviser.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information please visit www.smith-pinching.co.uk