Boost your pension – even after retirement

Retirement used to be black and white, one day you were at work and the next you were a pensioner.

Today “retirement” is more of a phase, particularly since 2015 when pension freedom was launched. Pension funds can now be accessed from age 55, allowing a gradual retirement before fully giving up work.

While you may have thought about taking money out of your pension fund flexibly, what about continuing to put money into your pension after drawing money out? Why would you possibly want to do such a thing?

Shot of a young woman showing something to her parents on her tablet while they sit on a sofa together

Tax relief

Even if you don’t pay income tax, you can still contribute up to £3,600 to your pension each year (up to age 75). The tax relief available means that you actually pay £2,880 and the Government tops this up to £3,600 with £720 of tax relief.

When you come to take the money out, 25% is free of tax and the rest is added to your income. If you stay within the personal allowance then no tax would be payable, even after receiving the relief in the first place. This might be a good way of rebalancing the income a couple receive in retirement and allow better use of the combined personal allowances.

Inheritance tax

Pension funds are also protected from inheritance tax (often abbreviated to IHT). The fund isn’t included as part of your estate so no IHT would apply if death is before age 75. After age 75 then the beneficiaries pay their own marginal rate of tax on the fund they receive and this could be lower than the IHT.

Points to consider

Too good to be true? No, but there are some catches. The Government does not want to pay too much tax relief on contributions coming from tax free lump sums (in other words, where you double up on the tax relief.) If you take lump sums of more than £7,500 in any 12 months then watch out when making any further contributions. Pension income doesn’t count as relevant earnings – so if pensions is your only source of income any new contributions are restricted to £3,600 each year. If you do have other earnings, then drawing a flexible income from your pension fund could restrict future contributions, known as the Money Purchase Annual Allowance.

This information is based on our understanding of current pension rules. The rules on pensions change regularly and a tax liability could impact your overall financial planning goals. If you’d like to discuss your retirement plan, we’d recommend contacting your independent financial adviser.