Much has rightly been written about the plight of those whose incomes have been hit hard by the Covid pandemic, but there is also a large number of people who have seen their savings swell during the crisis, with as much as £100 billion extra salted away by those who have not seen their incomes fall, but whose opportunities to spend have been restricted by successive lockdowns.
One study found that over 30 per cent of people with savings accounts had increased their monthly deposits since the start of the first lockdown; the same report also found that the average Brit has saved £617 a month through reduced travel costs, not going out, not being able to indulge in non-essential retail, and other areas. For those whose income has remained constant, that’s a lot of extra cash being salted away.
For many of those ‘Covid savers’, that surplus cash will be sitting in savings accounts offering paltry interest rates, which means that their nest-eggs will diminish in real terms very quickly. So now is a good time to consider whether to transfer some of that money into your pension, while there still the opportunity to use the current tax year’s pension contributions allowance.
Individuals can put 100 per cent of their earnings up to a cap of £40,000 a year into their pensions, and even those with no earnings can contribute up to £3,600. These limits include any contribution made by an employer.
Maximising pensions contributions is not just about using up allowances – doing so can bring tax advantages as well. For example, for high earners, sacrificing salary for pension could help the employee reclaim their personal allowance by bringing their income back below £100,000.
For employers, salary sacrifice has the attraction of reducing employer’s national insurance contributions (which are not payable on pension contributions), so such a move could be a win:win.
And for those running their own businesses making contributions from the company is deductible against corporation tax, which given the Chancellor’s intention to raise this particular levy, will become an even greater attraction in future years.
But it is those who have seen their cash savings swell over the past 12 months who should be thinking hardest about maxing out their pension contributions. The money which they haven’t spent on holidays, eating out and other ‘normal’ discretionary expenditure is much better off invested in their pension than languishing in a low-interest savings account.
By and large (but not exclusively) these people are older and more established in the workforce, for whom saving for retirement should be a priority (and who won’t be tying their cash up for too long, given that from the age of 55, 25 per cent of a pension pot can be withdrawn tax-free).
There is one further advantage: with pension pots sitting outside someone’s estate, the predicted rise in capital taxes is yet another reason why a pension is by and large a good home for any spare cash.
Of course, everyone’s situation is different, and it’s important to take advice before putting money in a long-term commitment like a pension. But there are few investments which offer such an alluring combination of tax incentives and security for the future, and for those ‘Covid savers’, it’s an obvious choice.