What is the best way to save for retirement?

We all want to enjoy a long and happy retirement enjoying the things we love the most. Of course, to do so we need to plan for the future and set aside enough funds. But what’s the best way to save for retirement? And are there any alternatives to pensions for high earners who face increasingly more onerous tax burdens? 

Read on to find out how to save for retirement with this handy retirement savings plan.

The best way to save for retirement

Knowing how to save for retirement becomes slightly more complicated for high earners. However, there are some tried and tested methods, as well as some fairly generous tax reliefs, at your disposal. The following are just some of the best ways to save for retirement:

Start early – The earlier you start saving, the more your retirement savings will grow.

Clear debt – Paying off debts frees up more funds for your retirement savings pot.

Stay focussed – Prioritising your pension will help you in the longer term.

Set goals – Setting clear goals will give you the motivation to save for the future.

Increased pension scope for high earners

In Jeremy Hunt’s 2023 Spring Budget, the Chancellor announced a raft of measures that gave high earners added scope to boost their retirement savings using a combination of pensions and tax relief measures.

The big news was that the annual tax-free allowance for pension contributions increased from £40,000 to £60,000. Of course, for high earners with a “threshold income” (your annual income before tax, minus any personal and employer pension contributions) of £200,000 and an “adjusted income” (all taxable income before tax, plus the value of your personal and employer pension contributions) of £260,000 (an increase of £20,000), this allowance is curtailed.

This is the “tapered annual allowance”, which was introduced by the government in April 2016 by then-Chancellor George Osborne. If you meet those income thresholds, then for every £2 you earn above the adjusted income of £240,000, your annual allowance will be reduced by £1. 

For example, if your adjusted income was £260,000, your annual allowance would be tapered to £30,000. Tapering now stops at £360,000 rather than £312,000, at which point the allowance minimum taper is £10,000, having increased from £4,000. 

The current lifetime allowance of £1,073,100 will also be abolished at the beginning of the 2024-25 tax year. This is another major benefit for high earners with serious retirement savings to their name. As such, you won’t face a tax bill no matter what the total value of your pension reaches over your lifetime. 

However, bear in mind that the way you make tax-free withdrawals has changed. Before, you could take up to 25% of your entire pension tax-free. Now, this tax-free amount is capped at 25% of the total value of your pension or £268,275 – whichever is lowest.

Alternatives to pensions for high earners 

Despite these relatively generous measures, pensions still represent diminishing tax efficiencies for the highest earners. As such, other alternatives to pensions can be useful to have in your armoury. 

The following are just some of the options available:

Carry Forward

In 2023/24, you can exploit your unused annual allowance dating back to 2021/22. Known as “carry forward”, this means that if your earnings are high enough, and you have not paid into an existing pension in the previous three tax years, you could make up to £140,000 of pension contributions in 2023/24 with full tax relief. High earners with tapered annual allowances may still be able to benefit from carry forward, depending on the circumstances.

Salary Sacrifice

You can save national insurance contributions by asking your employer to reduce your salary or your bonus and use the money, including the NIC saving, to make the pension contributions for you. The technical name for this is salary or bonus sacrifice and it is perfectly legal, if you do it correctly. If you pay higher or additional rate income tax, the result could be an increase of around 18% in the amount paid into your pension.

Lifetime ISA (LISA)

If you’re aged 18 to 39, you can invest in a Lifetime ISA (LISA). For every £4 you save, the government adds £1. That means if you save the maximum £4,000 per year, you’ll receive a tax-free injection of £1,000. This bonus is paid monthly, which means you’ll also benefit from compound growth up to your 50th birthday. Bear in mind that any LISA contributions you make count towards your annual ISA limit, which is currently £20,000.

Self-Invested Personal Pension (SIPP)

A self-invested personal pension (SIPP) lets you take control of your pension investments. If you’re a business owner you may be able to use your pension to develop it more tax-efficiently. For example, you can hold commercial property and company shares in a SIPP or build up a portfolio of investments. A SIPP also offers a flexible and tax-efficient way to turn your pension fund into an income for your retirement. 

Refine your retirement savings plan with Acumen

The pension landscape is a complicated place at the best of times. However, when you’re a high earner it becomes even more complex. Therefore, if you want to maximise your retirement savings, it’s essential to make the most of all the tax reliefs and savings vehicles available. Often, the guidance of an independent financial adviser can pay dividends, helping you to cut through the noise and make the most informed decisions.

Here at Acumen Financial Partnership, we’ve been providing straightforward financial advice for nearly 20 years. Our client-centric approach and completely unbiased advice is tailored to help you reach your unique financial goals. Saving for retirement needn’t be complicated if you’re a high-earner. Our impartial advisers can give you the advice you need to maximise your retirement savings as tax-efficiently as possible.

For more information about pension planning, or to speak to one of our advisers, please contact Acumen today by calling 0151 520 4353 or email us at [email protected].