Are you Making the Right Financial Decisions?
Following the changes announces in the Summer Budget, action is needed to maximise pension allowances before the end of the tax year.
Annual Allowance cut for high earners
A new tapered ‘annual allowance’ (the amount you can contribute to a pension) is being introduced from 6 April 2016 for individuals with income in excess of £150,000 (this includes pension contributions). The annual allowance will be reduced by £1 for every £2 of income in excess of £150,000. The reduction is capped at £30,000; hence the maximum reduction is from £40,000 to £10,000.
This means that individuals with income of
• £110,000 or less will retain the full annual allowance of £40,000
• £210,000 and above will have an annual allowance of £10,000
• Between £150,000 and £210,000 will have an annual allowance of between £10,000 and £40,000. For example if ‘adjusted income’ is £180,000 the calculation is £180,000 - £150,000 = £30,000 divided by 2 = £15,000. The annual allowance will therefore be £40,000 - £15,000 = £25,000.
So – if your income (including investment income) exceeds £110,000 speak to an adviser to ensure you are making the most of the allowance as it stands now.
An opportunity to put in an extra £40,000 before 5th April 2016
In order to facilitate this new tapered annual allowance all pension input periods are to be aligned with tax years. Transitional rules being introduced mean that all pension input periods open on 8 July 2015 will end on 8 July 2015. The next pension input period will start on 9 July 2015 and end on 5 April 2016. For all new arrangements with a pension input period starting on or after 9 July 2015 the end date will be 5 April 2016.
So any individual who have contributed to a pension arrangement from 6th April 2015 to 8th July 2015 will have additional annual allowance of up to £80,000 (minus whatever they have already contributed).
Pension Consultation - will the 40% tax relief be removed for personal pension contributions?
The government has issued a new consultation ‘Strengthening the incentive to save: a consultation on pensions tax relief’. This will review the current tax incentives that investors receive from pensions and industry experts can submit theirs view by 30th September.
The government has not put forward a specific proposal for reform, however the rumour mill talks of a tax relief rate of 30% across the board.
It therefore makes sense to consider pension contributions before the tax-year end if you are a higher or additional rate tax payer.
Pension Death Benefits - Review your nomination forms
Any lump sum death benefits paid to an individual will be subject to the recipient’s marginal rate of income tax if they are taken out of a pension environment.
Those paid to an individual who is the ultimate beneficiary will no longer be subject to the special lump sum death benefits charge of 45%. They will be taxed as pension income and tax will be deducted under PAYE. The tax charge will remain at 45% where the taxable lump sum death benefit is paid to someone other than an individual who is the ultimate beneficiary, such as a trust or a company. This means that the Spousal Bypass Trust may no longer be suitable for some people.
It is therefore essential to review your death benefit nomination forms on your pension plans as soon as possible.
Lifetime Allowance (LTA) cut to £1m
From 6th April 2016 the lifetime allowance will be reduced from £1.25 million to £1 million. Investors are able to secure the current lifetime allowance of £1.25m but no further contributions can be paid after this.
Whilst you may think that you are not near this new limit, compound growth gives you an idea of the ‘real’ lifetime allowance:
Pension value needed now to exceed the new lifetime allowance in the future:
No further pension saving after April 2016
Fund grows at 4% pa, compounded (after costs)
CPI is 2.5% pac
It makes sense to get advice on your lifetime allowance situation now, especially if your fund is valued at £600,000 or more.
Pension benefits that exceed the lifetime allowance face a tax charge of 55%.
Actions Needed Now
Consider making the most of the current pension tax legislation – speak to an adviser about maximising contributions before 5th April 2016
Review your existing death benefit nomination forms
Review your lifetime allowance situation – is it worth applying for the new transitional protection to retain the lifetime allowance of £1.25m?