New pension rules proposed by George Osborne could allow workers approaching retirement to drastically reduce their National Insurance and income tax bills.
Many employers already use a process known as 'salary sacrifice' to pay pension contributions directly to employees rather than deduct it from their salaries. This allows both the employer and employee to reduce National Insurance bills.
In the coming year, workers approaching retirement could be in line to invest much larger amounts via salary sacrifice, knowing they can access all of the money when they choose to take their pension.
On top of the National Insurance savings for employers and employees, there are also significant income tax savings to be made. Up to 25% of a pension pot can be taken as a tax free lump sum. From next year, the rest can be taken at a marginal rate of tax.
Stephen Berry, personal finance specialist at NFU Mutual, explained: "Pension contributions are a very tax-efficient way to pay someone, so long as the sums involved are within the annual and lifetime limits. The only problem, up until now, has been the strict rules on how and when you can access money in your pension pot.
"On the face of it, there will soon be an opportunity for people at or approaching the minimum pension age to increase their pension contributions and, in a few months or years, enjoy more of their hard-earned income.
"People approaching retirement may be ideally-placed to afford this commitment as many may have lower living costs, owning their homes outright and with children who are financially independent.
"For the generation at or approaching retirement age, there are some significant financial benefits to be had. Employers could reduce their National Insurance bills as well.
"It's likely that we'll see a lot more detail from the Treasury over coming weeks and months. This may mean only those in their final year of employment can make these savings rather than allowing people to repeat this process throughout their later working lives."
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