We’re big advocates of regular monthly saving if you’re looking to build up cash and other investments for the future. Generally people find it much easier to save a little bit each month, rather than waiting and hoping to save bigger lump sums from time to time. However, there are times when an opportunity to save a one-off large sum comes along – perhaps because of an inheritance, a bonus from work, or a redundancy payment. It’s not unusual in those circumstances for people to consider making a large pension contribution. It can also be an attractive option for limited company owners if they’re having a particularly profitable year.
An important thing to keep in mind, though, is that there’s a limit to how much you, your employer or your own limited company can contribute to your pension pot each year without attracting a tax charge. For most people, that limit is £40,000, though it can be as low as £4,000 for people with very high incomes. The £40,000 limit means that most of us don’t need to give any thought at all to the level of day-to-day pension contributions we’re making. But someone considering a large one-off contribution might need to keep it in mind.
The good news is that you can generally use any unused allowance from the previous three tax years as well as the current year allowance, so that can be very helpful if, say, you want to put £70k into your pension fund all in one go. However, you can only do that if you were a member of a registered pension scheme in those earlier tax years. So in practical terms, if you think there’s any chance that you might have an opportunity to make a large pension contribution at some point in the future, it could be a good idea to open a pension scheme right away if you don’t already have one, to effectively unlock the annual allowances for the intervening years and make them available to carry forward.
As ever, an IFA is the person to talk to if you’re thinking of investing in a pension. Although we can help with the tax aspects, we’re not authorised to give investment advice, so we’d definitely recommend speaking to an IFA if you think you might want to make large pension contributions in the future.
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