One of the great things about pension contributions is that they don’t cost as much as you might think.
Tax relief means that the impact on your take home pay is typically less than the value going into your plan, plus many people will benefit from contributions from their employer too. It’s explained in greater detail here.
And for one group of people, there is a further way to make the deal sweeter still - and it involves Child Benefit.
Child Benefit is available to anyone responsible for a child under age 16, or age 20 if in full-time education or training. It is potentially worth £20.70 a week for the first child and £13.70 a week each for any further children.
This benefit used to be available no matter the wealth of the parent or guardian, but this was changed so that the benefit is reduced gradually if at least one parent or guardian earns more than £50,000, and it is removed completely if any parent or guardian earns above £60,000.
In practice, the system still pays out the full Child Benefit in these circumstances, and the reduction is made via a ‘High Income Child Benefit Tax Charge’ that is taken via the self-assessment system.
Here’s the bit that matters - your earnings for the purpose of working out your Child Benefit entitlement are net of pension contributions and some other employee benefits - known as ‘adjusted net income’. In other words, it’s the money that’s left after pension money has been deducted that is measured.
So, parents earning between £50,000 and £60,000 a year can reduce their adjusted net income, and thereby escape the High Income Child Benefit tax charge, by making pension contributions.
For example, someone earning £55,000 with two children would be entitled to Child Benefit of £1,788.80, but with a High Income Child Benefit tax charge of £518 to pay.
Making a pension contribution of £5,000 would bring them below the threshold for the charge. In order to do it, they would have to pay £4,000 of their after-tax income, and claim another £1,000 of benefit through self-assessment, so the eventual cost to them would be just £3,000.
And they would, of course, also escape the £518 High Income Child Benefit tax charge. Discounting that from their pension contribution takes its effective cost to just £2,482.
So that’s £5,000 saved into a pension for the effective cost of £2,482.
Alternatively, other non-cash employee benefits that you elect to receive - such as childcare vouchers or a company car - will also reduce you adjusted net income.
Anyone in this position interested in doing this could benefit from professional advice.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be allowed to access money held in a pension till the age of 55. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.