Pensions are a key part of any retirement plan. There are many different types of pensions, including personal, workplace, stakeholder, SIPPs and the state pension. You may be unsure whether there are limits to the number of pension schemes you can have. In short, there are no restrictions either on the number of pensions you can pay into, or that you can draw from at retirement. However, there are regulations and considerations to take into account when determining how many pensions you should have.
Pension restrictions
Whilst you can pay into multiple pension schemes at one time, there are restrictions on the value of your contributions. The annual pension allowance is the maximum you can pay into a pension each year whilst claiming tax relief. The current allowance is set at £60,000.
There is currently a lifetime allowance for your pension contributions too, set at £1,073,100. However, in the 2023 Budget, the Chancellor announced the abolition of the allowance from April 2024. This will mean that the highest earners will be able to save more for retirement whilst claiming tax relief. You can read more about what this means for you in our blog post: Decoding a scrapped pension lifetime allowance.
Other considerations
As well as the tax relief considerations, there are other factors to think about when reviewing your pension portfolio. Whilst multiple pensions are allowed, there are a few drawbacks of this.
Each pension fund will have fees associated with releasing the funds when you reach retirement. The more pension pots you have, the more iterations of fees you’ll be subject to. There is admin associated with pensions too. If you move house you need to make sure to inform your pension provider of your new address. The more providers you have, the bigger the task this is! It can be easy to lose track of multiple pensions, which could mean that you be missing out on money at retirement.
Ultimately, pension schemes are investments. If you hold multiple pensions, it is likely that some will outperform others. Managing multiple pensions to ensure they are performing optimally is time-consuming. Consolidating your pensions into one pot may be the right path for you to maximise the growth of your funds.
Higher Rate Tax Payers
Most auto-enrolment workplace pension schemes set up after 2012 are on a ‘relief at source’ basis. This means that all employees will receive 20% extra into their pension pot on every contribution they make. So, by contributing £100 into your pension, you will receive £125.
If you’re a Higher Rate Tax Payer, you need to inform the HMRC of an extra 20% tax relief that they owe you. You may inform them of all contributions backdated four years. This could result in thousands of pounds being paid to you by the government at no additional cost to you.
If you’re in a salary sacrifice scheme, higher rate tax payers can increase their pension contribution. By contributing more over a year, your taxable salary can be brought under the tax threshold for 40% tax. You will therefore only pay tax at 20%, will be eligible for full child benefits, and also be contributing more to your retirement.
For example: if your salary is £80,000 and you contribute £30,000 to your pension, your taxable salary will be £50,000. This is under the threshold for higher tax, and for child benefit eligibility.
Next steps
Ultimately, you can both pay into and receive from multiple pensions. Contact us now for a free consultation, where we can explore with you if this is the right path for you. There are lots of factors to take into consideration, and we’ll walk you through your options.
Not yet got a Private Pension? We can help with that too! We look forward to hearing from you!
