How do I top up my pension?

You can maximise your private pension in the years before you retire by making extra contributions to it. You can do this at any time, but it may be more practical to do so near retirement.

Topping up your pension in your final working years can result in a higher income when you retire.

Here’s an explanation of how it works and a summary of the pros and cons.

How do pensions work?

Most workplace pensions (and all personal pensions) involve you paying into an investment fund over many years. This steadily growing portfolio of investments is known as a pension pot.

You can access your pension pot in a number of ways from the age of 55 (although this age is increasing in the future).

Money paid into your pension qualifies for tax relief, which has the effect of boosting it by 25% (or more if you pay higher rate tax). Growth is also free of tax. This makes your pension a very powerful way to maximise your retirement savings.

Find out more about how pensions work.

What are the benefits of making large pension contributions?

Normally you’ll pay a regular sum into your pension each month.

However, there are several reasons why you might want to make large one-off contributions.

Increase your pension pot

This is the simplest reason: it’s good to store away as much money as you can in your pension, to generate as much growth as possible before you need to start drawing an income from it.

Boost your savings with tax relief

Every payment you make into your pension benefits from 20% tax relief (more if you’re a higher-rate taxpayer).

This means that every pound in your pension only costs you 80 pence in contributions. There’s no better way to give your savings such an instant boost.

Shelter money from inheritance tax

Pension pots are exempt from inheritance tax (IHT), and you can pass them on tax-free when you die.

This means that if your estate may be subject to IHT, you can reduce it by making additional payments into your pension, and still pass on the money in the event of your death.

Use up your annual allowance

Everyone has an annual allowance which the maximum payable into pensions in any given tax year (currently £60,000) while receiving tax relief.

Any unused allowance from the previous three tax years can be ‘rolled over’ to the current year.

For example, if you were paying in just £20,000 a year of your allowance over the past two years, then this year, you’d be able to make a lump sum payment of up to £120,000 and still be under the annual allowance (provided you meet the eligibility criteria).

Avoid the child benefit tax charge

Child benefit is worth £3,094 a year to a family with three children in the 2024/25 tax year with the first child being eligible for £25.60 a week, and then £16.95 per child per week thereafter.

Depending on each parent’s individual earnings, you may be liable to pay a tax charge.

If either parent earns £60,000 or more, the charge is 1% for every £200 over £60,000 you earn, which means the charge completely cancels out the benefit if either parent earns £80,000 or more.

However, paying into your pension reduces your taxable income that contributes to this threshold, meaning you could reduce your income to below £60,000 and keep your full child benefit.

As mentioned, there’s additional tax relief with pension contributions, which can make this a high-value strategy if you’re close to the earnings threshold and have kids.

Maximise your bonus

If you receive bonuses from your employer, you may be able to obtain more value by requesting an employer pension contribution instead.

A pension contribution saves on both employer and employer National Insurance contributions, meaning you could receive more money that you would have as a cash bonus.

This would also reduce your overall taxable income for the year, potentially enabling you to avoid the child benefit tax charge (see above).

When is a good time to pay more into my pension?

You can make additional payments into your pension at any time. Just remember that you can’t access your pension until you’re 55 (at the earliest), so don’t pay in any savings that you may need before then.

Once you reach 55, you can transfer savings into your pension knowing that you can access them again if you need to.

Be aware however that a pension is not like a bank account, and that there can be drawbacks to accessing your pension too early – see below. A financial adviser can help you decide what to do.

What are the drawbacks of transferring savings into my pension?

Despite the boost to your savings if you move them into your pension, there are some disadvantages of doing this. Make sure you consider these before making any decisions.

1. Pension withdrawals can be taxed

When you draw money from your pension, it counts as income and so can be taxed.

You’ll still have your tax-free personal allowance, but any income above this will be taxed at the normal rate. If you draw too much in one year, you may largely cancel out the boost you received from tax relief.

2. Pensions can fluctuate in value

Pensions are invested in assets designed to deliver long-term growth. This means that in the short term they can fluctuate a great deal.

Bear this in mind if you want to access a large sum in the near future (e.g. to buy an annuity) – in which case you may want to move your pension fund into lower-risk assets.

 3. Accessing your pension limits how much you can pay in

Although you can access your pension at any time from the age of 55, doing so reduces the amount you can pay into it.

Once you access your pension, your annual allowance reduces to just £10,000 (from £60,000) under money purchase annual allowance (MPAA) rules.

Therefore, avoid transferring money you might need in the short term into your pension if you also plan to continue contributing to your pension.

You also might be worried about exceeding the lifetime allowance (LTA), which previously capped the amount you could save into your pension without facing tax penalties - and was scrapped in April 2024.

So, you no longer need to worry about exceeding an LTA limit, regardless of how large your pension savings grow.

Should I top up my pension?

If you have savings or income to spare and are approaching retirement age, additional contributions may be a good idea for you.

However, you should talk to a financial adviser first to ensure you are making the best decision.

Get expert financial advice

Topping up your pension before retirement can significantly boost your savings and provide long-term benefits like tax relief and sheltering funds from IHT.

However, it’s important to consider the timing, your overall financial goals, and any potential drawbacks, such as taxation on withdrawals and MPAA limitations. By carefully weighing the pros and cons, you make the most of your pension contributions as you approach retirement.

Let Unbiased match you with a financial adviser for expert financial advice tailored to help you optimise your pension contributions and boost your retirement savings.

Did you find this article useful? Then you might also find our article on pension alternatives informative, too!