I am self-employed and earn around £70,000 a year, but currently have only £20,000 in my pension. I have some savings and am considering using £15,000 of these to make a pension contribution, both to increase my retirement savings and potentially reduce my income tax liability. I understand that the annual pension allowance is £60,000, subject to the usual rules. Would it be sensible to contribute more than £15,000 from my savings, and could I do so without incurring any tax penalties?
Arthur Weller replies:
Making a gross pension contribution of £20,000 will be efficient, because the result will be not paying the higher rate of income tax of 40%, since effectively your income tax basic rate band will be increased from £50,000 to £70,000. Because you have an annual allowance of £60,000, you can certainly contribute more than £15,000 from your savings without incurring any tax penalties, but be careful of putting so much of your savings into the pension that you leave yourself without an adequate emergency or cash reserve, because pension money is generally inaccessible until minimum pension age. Seek expert financial advice before taking any action.
