‘Mad March’ sees pension contribution rush at tax year end

Our head of pensions and savings comments on the findings from interactive investor data.

The run-up to the end of the tax year is traditionally known as “ISA season”, but interactive investor data suggests it could equally justify the title “pension season”.

Throughout March, the average pension contribution made in each week on the platform was £5,425 – slightly higher than the average ISA contribution per week in March of £5,378.

Both average SIPP and ISA contributions in March were significantly up on the average contributions made in a week throughout the rest of the year, which were £2,843 and £2,816 respectively in 2021/22*. Interactive investor, the UK’s second-biggest investment platform for private investors, offers SIPPs, ISAs, Junior ISAs and GIAs (General Investment Accounts).

The data suggests investors who have a SIPP view the end of the tax year in a similar way to ISA investors who scurry to meet the deadline of 5 April to max out their allowance. SIPP holders appear to have been rushing to fill up their annual pension allowance as well, which for most workers is either £40,000 or up to their level of earnings in the year, whichever is lower. Pension contributions over someone’s annual allowance do not receive tax relief.

Non-earners can add up to £3,600 in total to a pension and still get tax relief each tax year. There is also a tapered annual allowance for high earners with ‘adjusted income’ over £240,000, with the allowance reducing by £1 for every £2 earned over this amount to a minimum of £4,000. The pension annual allowance includes personal contributions and those made by an employer or another third party. Contributions to a pension above the annual allowance are liable for tax.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “We don’t tend to think of there being a rush to fill up a pension annual allowance towards the end of the tax year in the same way we view filling up the ISA allowance. However, our data suggests that many people with SIPPs do want to make the most of their pension annual allowance. The pension annual allowance works differently to the annual ISA allowance, but because of the tax relief on offer on pensions, ‘maxing out’ your pension can also be a good investment strategy.

“The ability to make additional contributions and get tax relief up to your allowance doesn’t just apply to SIPP investors. Workplace pension investors may also be able to make additional contributions to their workplace scheme beyond their regular contributions if they want to take advantage of the annual allowance. Additional contributions from a bonus can be a good use of extra income, too.

“Given high inflation and the increase to National Insurance, as well as wage rises taking more people over the frozen higher-rate income tax thresholds, pensions and the tax relief and additional employer contributions they offer can be viewed in a new light – as a way of combatting inflation and reducing current income tax bills, as well as boosting future financial security. As we go into the new tax year, it might be worth considering whether increasing pension contributions could be the best strategy for any extra cash you have.

“Don’t forget that even if you don’t plan to retire until you are in your 60s, you can access your pension from age 55. So by paying more into a pension now, older workers approaching this age might only be deferring income for a few years in order to receive significant tax benefits.”

For those who have already started to take taxable income from their pension, the annual allowance falls to £4,000 – the Money Purchase Annual Allowance. Some pension investors might also be able to use up unused annual allowance from the previous three tax years, known as ‘carry forward’.  

O’Connor continues: “Those who opt to max out their pension should also be mindful of the Lifetime Allowance of £1,073,100, which is a cap on the value of benefits built up in a pension before a tax charge applies. You can still pay more into a pension than the Lifetime Allowance and it still might be beneficial to do so despite the prospect of tax charges, depending on your circumstances. If you are in doubt about whether or how you might be affected by annual or lifetime allowance limits, speak to Pension Wise, the free government pension advice service, or contact an independent financial adviser.”

Notes to editors

*The weekly contribution figures refer to the average amount paid in per customer in a week, not a regular weekly payment by each customer