OCTOBER 2015 - High Earners need to act now regarding Pension Funding
The new pension rules which arrived in April this year were unique in one respect in that a sharp intake of breath was experienced by both financial advisers and savers with regard to the extent of the changes. Commentators have struggled to finish the phrase “the most far reaching changes since….” with the general consensus being that the sentence can legitimately be topped with the words “well…forever”.
To date the vast amount of publicity surrounding this new found flexibility has focussed around pension scheme members being able to access their pension fund in its entirety rather than having to rely on a small proportion of their fund paid out as capital and the remainder in the form of a limited income. Rumour has it the sales of cars and caravans have directly benefitted from this cash injection to the economy.
There is no doubt that the new flexibility should be roundly welcomed however, now that the dust has settled, it is important to look at some of the wider ranging features of the new rules. As in the past when beneficial legislation is passed there is usually a “sting in the tail” somewhere down the line and in this case the “downside” relates to the restrictions which now affect the level of contributions which can be made, particularly for “Higher Earners”.
The Lifetime Allowance (the amount which pensions savers can hold before an additional tax is due) will be reduced to £1 million in April 2016 and this will capture many more pension savers than ever before. Additional limitations remain regarding the maximum contribution which can be paid annually; again before additional tax must be paid, this is currently £40,000.
However potentially the most far reaching aspect of the new rules relate to individuals who earn in excess of £150,000 per year; in other words those in the 45% tax band.
At present anyone who chooses to contribute to a pension scheme benefits from tax relief at their highest marginal rate. This is currently either 20%, 40% or 45%. This undoubtedly makes a pension contribution very attractive, particularly for those who can afford to make significant contributions and who can receive 45% relief on their payments.
As from next April however this group of individuals will find that this benefit will be severely reduced. From that date the standard £40,000 annual allowance will be reduced by £1 for every £2 of income which higher earners have over £150,000 until their annual pension allowance drops to only £10,000. In other words someone who has income in excess of £210,000 will see their annual allowance drop by £30,000 (i.e. £60,000 of excess income divided by 2).
And, there is a further restriction in that a new definition of income is being introduced to be known as “Adjusted Income,” which will take into account all aspects of remuneration and not just that related to salary.
I appreciate there is a lot to take in here but the key point is that these restrictions do not take effect until next April, which allows me to introduce that well-worn phrase “we now have a window of opportunity”.
The following opportunities remain available and should be high on any agenda relating to pension and wealth planning:
- If funds are available, pension savers should consider maximising their payments prior to next April before their funding levels potentially drop. These contributions can come from both individuals and from their companies with the latter option offering further significant tax planning opportunities.
- The “powers that be” have finally realised that the archaic rules relating to “pension input periods” (PIPS) need to be simplified and they have now taken a substantial step towards achieving this goal.
- All previous input periods were closed on 8th July 2015 with a transitional period running from that date until the end of the tax year.
- The annual allowance for the first part of this year up to July has now been set at £80,000 and for the second part it is the remainder of what was unused from the first part up to a maximum of £40,000.
- This means some savers could potentially maximise both Pension Input Periods and invest £80,000 and receive the full availability of tax relief. Should no contributions have been made before July they still have the £40K available before next April.
- This change has a far reaching influence and 40% tax payers would also do well to take note of it.
- The ability to “Carry Forward” relief from the previous 3 years still remains. In certain circumstances this can add up to a further £140K of contribution allowance.
Having read back through what I have just written I am reminded that that the world of pension planning remains as complex as ever. What ever happened to the government’s term “Pension simplification” which they introduced in 2006?
I must stress at this time that the detail I have included above is for information purposes only. It is important that formal independent advice is taken before any action is taken on these matters. The key issue is that “planning” needs to be undertaken soon or “doors” will close and who knows, there may even be additional pension legislation introduced in the future.
French Duncan Wealth Management Ltd are independent financial advisers. The company is directly regulated and authorised by the Financial Conduct Authority.