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Pension Top Up

20 January 2016

Many experts are predicting big changes to tax relief on pensions, possibly with effect from the next Budget in March.  Changes already announced will restrict relief for higher earners from 6 April.  Now may therefore be the time to get as much money into your pension as you can, especially as changes announced in the Autumn Statement enable many people to top up their pensions in 2015/16 at a higher rate than normal.

Proposed Changes

Currently, you can claim tax relief for pension contributions of up to £40k per annum (the annual allowance). 

However, changes announced in the Autumn Statement will restrict tax relief for higher earners.  From 6 April 2016, individuals whose total income exceeds £150k are broadly to have their annual allowance for pension purposes reduced by 50p for every £1 over the £150k limit, down to a minimum annual allowance of £10k per individual (where income exceeds £210k).

Plus, the £150k limit can be reduced even further where employer pension contributions are paid.

This could significantly reduce ability to pay pension contributions post 5 April 2016.

Also, currently, tax relief is available (at the same rate of income tax you pay) when the pension contribution is made, but the pension income you receive in retirement is taxable.  As your income is generally lower in retirement, this means that you could be getting tax relief at higher rates now, but only paying tax at lower rates in retirement.  

However, the government previously consulted on proposals to flip the system, so that pension contributions wouldn’t attract tax relief but pension income in retirement would be tax-free.  This could potentially significantly reduce the tax saving over your lifetime.

An alternative proposal is that upfront tax relief is maintained but that the rate of relief is restricted, so everyone gets the same rate regardless of which income band they fall into – so higher rate taxpayers may only get basic rate tax relief (or less).

Regardless of what exactly happens, it’s clear that tax relief on pensions is going to be considerably less for higher earners going forward.

What can be done?

To soften the blow a little, it was also announced in the Autumn Statement that all pension input periods will be aligned to 5 April and that, as part of this process, each individual will have an annual allowance of £40k for the pension input period from 6 April 2015 to 8 July 2015, and a further £40k for the pension input period from 9 July 2015 to 5 April 2016 – so £80k (instead of £40k) in total for the year to 5 April 2016.

This clearly gives many individuals a one-off chance to claim tax relief on significant pension contributions before 5 April.

It’s worth remembering that, for now, unused relief for the last 3 years may also be carried forward.  This could permit even higher pension contributions to be made before 5 April.

High earners should therefore be making the most of the current system by considering advancing pension contributions into the 2015/16 tax year.

Please do however bear in mind that the lifetime allowance (the amount you can save into a pension tax free over your lifetime) will also be falling from £1.25m to £1m.

Before making any contributions you should ensure you speak to your pension adviser.

For further advice regarding the pension scheme changes please contact probertson@springfords.com

 

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