We have called this year the one to make pensions a top priority, especially if you pay an Income Tax rate of 40% or 45% or you are on track to build a pension fund that will exceed £1 million by retirement. It’s therefore imperative that you make the most of your tax-efficient allowances while you still can. So, what is actually changing?
Pension tax relief – reduction
While the Chancellor has strongly hinted that more radical changes to tax relief on pension contributions are on the horizon, we already know that from 6 April 2016 those who earn more than £150,000 will see their annual allowance fall to as little as £10,000.
For those affected, every £2 of income earned above £150,000 will reduce their annual allowance for pension funding by £1. It may also affect those who earn less than £150,000 through the inclusion of salary and bonus sacrifice arrangements, and employer pension contributions, in the calculation of your remuneration. As this is a complex area, it’s important that all those who receive total remuneration and investment income in excess of £100,000 contact a financial planner to gain a clear understanding of how they might be affected. Why not speak to our experts today?
‘Keep calm and carry forward’
With major changes soon coming into effect, the next few months could be the last chance to make contributions under the current generous allowances.
Under the rule known as ‘carry forward’, if you didn’t fully use your annual pension allowances in the previous tax years, you can sweep up unused allowances for the three previous tax years. You could contribute a maximum of £180,000 (£50,000 for tax years 2012/13 and 2013/14 and £40,000 for tax years 2014/15 and 2015/16) and qualify for tax relief at your highest marginal rate.Carry forward is therefore a complex area and if you are in any doubt about it, we recommend that you speak to one of our highly qualified financial planners.
There is also an opportunity to contribute up to £80,000 in the 2015/16 tax year if you made or registered a £40,000 pension contribution from 6 April 2015 to 8 July 2015 – this is because all pension input periods were reset on 9 July 2015, with a new input period lasting until 5 April 2016. This means some effectively receive an extra allowance.
A cut in the pensions lifetime allowance
The lifetime allowance is a restriction on the amount you can hold in pension schemes over your life without any tax charges being levied. If you exceed the lifetime allowance, the excess is subject to tax charges of 55%. From 6 April 2016, the lifetime allowance will reduce from £1.25 million to £1 million.
Proactively managing your pension arrangements prior to retirement and during the decumulation phase of retirement may allow you to reduce (or avoid) unnecessary tax charges. There are a number of different protections you can apply for. A tax charge can’t always be avoided, but it’s important to understand what impact the tax charge would have on retirement benefits. Our financial planning team are experts in this area – contact us to find out more.
We’re here to help
If you would like to speak to us about anything in this article please give us a call on 020 7189 2400, email us at email@example.com or simply request a call back and we will be in touch as soon as we can.
This article was previously published on Tilney prior to the launch of Evelyn Partners.