Think before saving

Mounting pressures on people to build a nest egg for retirement can sometimes force people down the wrong path. It’s important you develop a total savings strategy that will reduce the risk of losing money you set aside, but equally will maximise growth. As always, it’s about balance.

Parking some of your money in a pension scheme can deliver great tax breaks. As well as being tax efficient for new growth and income, you will get an extra 20% boost courtesy of our Government. Higher rate taxpayers can claim further tax relief through their tax return.

Pensions work like an investment wrapper, so are similar to an ISA. The difference is in the limits and benefits. Like any investment, you will choose which funds to invest your pension pot in. Higher returns and higher risks are likely to go hand-in-hand. However, these are long-term plans, so your pension performance should smooth out fluctuations in investments.

The downside of investing purely through a pension fund is it can restrict how and when you can access your money. Talking to a specialist retirement adviser can help you balance a pension with other more accessible investments and cash savings.

What are the limits?

You can now invest up to 100% of the annual allowance (£50,000 for tax year 2011/12,) or £3,600 whichever is higher. 

However, two main limits apply:

· Annual Limit

If you pay in more than £50,000 (2011 / 2012 tax year) then you will have to pay tax on any payments over that amount.

· Lifetime Limit

HM Revenue & Customs has a Lifetime Allowance on the total funds in pension plans that can be used to provide benefits for you. This allowance is £1.8million for the tax year 2011/12 and will reduce to £1.5million from the 2012/13 tax year. Any funds over this allowance will be liable to a tax charge of 55% for a lump sum, or 25% if taken as a pension.

Any money your employer pays into your pension will count toward these limits.

Do you need more help?

As retirement planning specialists, we can help you assess whether your pension contributions or fund/funds will be affected by these new limits.

If you’re raring to go now, the next step is to look at the different types of pension:

· Individual Pension Plans