Last chance saloon? Pension planning opportunities and pitfalls; action needed before 5th April 2016

There are significant changes happening to pensions, again, from April 2016. These changes include restrictions on future contributions and tax relief and a limit on how much you can save into pensions without a future tax charge. This article highlights these changes, identifies those who may be affected and the actions that need to be taken before 5th April 2016.

Are you sleepwalking into a 55% tax charge?  Wake up call for people of all ages

The Lifetime Allowance (LTA) is reducing from £1.25m to £1m from 6th April 2016

  • The LTA is broadly the maximum pension benefits anyone can accumulate in their lifetime.
  • Pension benefits cannot be accessed until age 55. Any value over the LTA will be taxed at up to 55% for those without ‘protection’.  The LTA tax should generally be avoided.

Who’s at risk and needs to take action?

For those with pension funds approaching £1m it might be appropriate to elect to protect an LTA of up to £1.25m to manage the impact of a lower LTA and maximise planning flexibility.

However, it is less obvious that younger people (say in their late 30s to mid 40s) with pension pots of around £400,000 or £500,000 might also be at risk. Why? £500,000 seems far away from £1m or £1.25m but time and the magic of compound annual growth mean that £500,000 growing at 7% a year will double to £1m in 10 years. That is without additional contributions.

For some, it might not be sensible to make additional pension contributions after 5th April 2016: they will receive income tax relief today but ‘sleepwalk’ into an LTA tax charge in the future.

Calling all higher earners: last chance saloon for large pension contributions?

The Annual Allowance (AA) for high earners is reducing from £40,000 to £10,000 from 6th April 2016

  • The Annual Allowance is a limit for how much people can save in a tax year. The limit is £40,000.
  • For high earners (earnings and employer pension contributions totalling over £150,000) the AA starts to reduce on a sliding scale with those earning over £210,000 restricted to a £10,000 AA. That’s a significant restriction compared to £40,000 (and the original AA of £215,000 in 2006).

The opportunity to save up to £180,000 to pensions at a cost of £99,000

High earners have a limited window until 5th April 2016 to make large tax-relieved pension savings before the new annual allowance comes into force.

Depending on previous pension contributions and taxable income in 2015/16 an individual could save up to £180,000 (or in very specific circumstances up to £220,000) in pensions this tax year with up to 45% income tax relief (that is a tax saving of up to £81,000). Put another way £180,000 is 18 times the new AA for a high-earner.

Time is running out – action needed in advance of 5th April 2016

In a nutshell, pension changes are coming and time is running out:  some decisions need to be made before 5th April 2016.

At Goodman Derrick, while we can advise you in relation to estate planning matters, we are not authorised to give financial planning advice. Pensions are fraught with complexity and, in view of the recent changes, pension arrangements ought to be reviewed at the earliest possible opportunity in order to maximise the available benefits and/or avoid drifting into an adverse tax position.

Should you have any queries or concerns relating to the matters raised in this article, please feel free to contact Ian Bradshaw, Clare Jeffries or Stephanie Brobbey in our Private Client Team who will be able to direct you to an expert in the pensions field.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.