Making the most of the ISA and Pension allowance
6 February, 2018
On 5 April 2018, each individual’s annual allowance for ISA and pension savings runs out, so it is important that they plan ahead and make the most of the opportunities on offer to them.
In most cases, people will have an annual pension allowance of £40,000 a year, over which they will start paying tax on their savings.
Savers can top up an allowance for the current tax year (6 April 2017 to 5 April 2018) with any allowance they did not use from the previous three tax years.
The tax year 6 April 2015 to 5 April 2016 was split into two periods with different tax-free allowances.
Savers can carry over up to £40,000 of unused allowance from the pre-alignment year to the post-alignment year, so they can also add this to any unused allowance from between 6 April 2014 and 5 April 2017.
However, if they have already withdrawn money from a pension pot they may find that their allowance has been cut and they may have to pay tax on contributions over £4,000 a year.
The lower allowance is sometimes called the ‘money purchase annual allowance’ and unlike a regular allowance, it cannot be topped up with a person’s unused allowance from previous years.
The annual allowance drops when an individual takes any of the following from a defined contribution scheme:
- cash or a short-term annuity from a flexi-access drawdown fund
- cash from a pension pot
- more than the limit from a capped drawdown fund.
If the allowance drops to £4,000 for a pension pot, the saver must tell other schemes they have pensions with within 13 weeks.
From April 2016 those on higher incomes may now also have a lower tapered annual allowance. This applies if:
- ‘threshold income’ is over £110,000 – income excluding any pension contributions
- ‘adjusted income’ is over £150,000 – income added to any pension contributions
Savers can check how much of their allowance they have used by speaking with their Independent Financial Adviser or by clicking here.
While pension savings may be highest on individuals’ list of things to check before the end of the tax year, it is also important to consider how they are using their annual ISA allowance.
As of 6 April 2017, savers in the UK have had an ISA allowance of up to £20,000. This can be spread across a number of ISA products including traditional cash ISAs, stock and shares ISAs, Lifetime ISAs or an innovative finance ISA.
Savings which remain in an ISA year-on-year will continue to reap tax-free benefits until withdrawn from the account, so it pays to review how much money is in a person’s accounts and how much they have put in within the last 12 months.
While most cash ISAs currently offer fairly poor interest rates, they are a tax-efficient method for storing and building up savings and are inherently less risky than other forms of investment and savings.