Know your Pension Changes in just 4 minutes

Friday, 13th November 2015 12:55 - by Lumin Wealth Management

Annual allowance 

Changes to pension tax-relief have been on the cards for some time. The Chancellor used the 2015 Summer’s Budget to confirm a gradual reduction in the annual allowance for high earners.

This means that for anyone earning over £150,000, the amount that they can contribute tax-free to a pension each year will be progressively reduced.

At present, anyone paying into a pension is entitled to tax relief on contributions of up to £40,000 a year. From April 2016 this will be reduced at a rate of £1 for every £2 earned over £150,000, until the tax-free limits hits £10,000. So those earning £210,000 and above would have an annual allowance of £10,000.

This is potentially a huge blow for a high earner who hasn’t already built up a decent-sized pension pot.

 Lifetime allowance

The government will also be reducing the lifetime allowance for pension contributions from £1.25m to £1m from April 2016. This is the limit on the value of payouts that can be made from the pension schemes without triggering an extra tax charge. For individuals who have pension savings that exceed £1m as of April 2014, they may be able to apply for protection, known as Individual Protection 2014 (IP2014). This gives them a protected lifetime allowance equal to the value of their pension savings subject to an overall maximum of £1.5m. Clients have up till 5 April 2017 to apply for this with HMRC.

Our advice to our clients is to maximise their pension contributions in the current tax year before the limits change.

Pension tax-relief

In a year that has seen the biggest shake-up to pensions in a century, the Chancellor has also indicated that he may be willing to go further with reforms to retirement saving. In the past there has been comment that the current system benefits the highest earners most. There is therefore talk of the government introducing a flat rate of pension tax-relief, which would see the current rebates for higher earners reduced.

How this all works - Case study example

Our client, a successful individual in the medical profession has earnings of £230,000.

He has an existing pension provision and has been paying in £20,000 into it every year. Our client was keen to pay in the maximum possible to his pension and make the most of the additional rate tax relief on his pension contributions.

Using carry forward, we explained to him about utilising his unused allowances from the previous three years, as follows:

Our client took advantage of £80,000 carry forward as well as a £40,000 allowance for this year making a total pension contribution of £120,000 for 2015/16.

He will receive 45% tax relief on all of this in 2015/16.

Whilst his pension allowance will drop to £10,000 next year due to his earnings being above £210,000 Lumin Wealth’s advice is to use as much of his unused allowances from previous years whilst they are still available.

Written by Lumin Wealth Management

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.