The combination of generous tax reliefs on contributions; tax-efficient growth within the pension fund; flexible access from the age of 55; and tax efficient death benefits can make your pension particularly useful for both retirement and estate planning.
There are many opportunities for pension planning, but as this is a complex area we suggest you talk to an Independent Financial Advisor (IFA) before taking action. If you do not already have an IFA we would be pleased to introduce you to one of our colleagues from Menzies Wealth Management.
Lifetime Allowance (LTA)
Pension contributions paid by an individual continue to attract tax relief at their marginal rate. The LTA for pension savings was reduced to £1 million with effect from the 6th April 2016.
The LTA will increase to £1.05 million from April 2019. The government has provided transitional protections but, unlike previous instances, the government has not set a deadline for applications. This means that, in certain circumstances, some individuals may still be able to apply for protection. This may be relevant for individuals who have already accumulated substantial money purchase pension funds (e.g. Personal Pension) or those who are high earners (or have been high earners) in relation to membership of a Defined Benefit Scheme.
LTA advice is a particularly complex area and individuals should think very carefully before foregoing valuable benefits from an employer (e.g. Employer Pension Contribution or accrual under a Defined Benefit Scheme) simply to avoid a Lifetime Allowance Charge. Of course, each situation should be considered on its own merits but we would encourage you to seek advice from an Independent Financial Adviser before taking action.
Pension Carry Forward
The pension annual allowance can be carried forward for three tax years providing you were a member of a registered pension scheme during that period. Any unused annual allowance for the three previous tax years (2016/17, 2017/18 and 2018/19) can be added to your 2019/20 allowance (giving a maximum contribution of £160,000) and will attract tax relief at your marginal rate.
If you run your own company, there may be an opportunity to extract profits tax efficiently by making this contribution through your company. The last opportunity to utilise any available carry forward allowance available from the 2016/17 tax year will be 5 April 2020.
Pension Tapered Tax Relief
Since the 6th April 2016, pension tapered tax relief has restricted the pension allowance of individuals with adjusted net income exceeding £150,000. These individuals have seen their standard allowance of £40,000 reduced by £1 for every £2 of income in excess of £150,000.
Individuals with an adjusted net income in excess of £210,000 will suffer the full reduction of their annual allowance to £10,000. No tax relief will be available for contributions in excess of this figures.
The definition of adjusted net income is complex but notably includes employer pension contributions as well as other sources of income such as rental income.
Pension Freedom Reforms
The pension freedom reforms introduced in recent years allow an individual aged over 55 to withdraw their entire pension fund as a lump sum. However, individuals considering doing so should be aware that pension funds withdrawn as ‘income’ are taxable at the recipient’s marginal rate.
A lump sum withdrawal can, therefore, result in a significantly higher tax bill than would be the case if the same income was withdrawn over multiple tax years, utilising each year’s respective allowances and income thresholds. Individuals should also note our earlier comments regarding the IHT efficient nature of pension death benefits as the withdrawal of lump sums will add to the ‘taxable estate’ when accumulated rather than spent. Again, each situation should be considered on its own merits.
Your BrighterThinking Next Steps
“Pensions remain an efficient planning tool for tax and as an investment tool, but specialist advice is essential. An innocent oversight can cause a raft of unwanted tax, and other, issues. Talk to us about an introduction to a Menzies Wealth Management Independent Financial Advisor.”
Ben Simpson – Menzies Wealth Management (MWM) CEO
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Menzies Wealth Management Team
Personal tax planning can be complex; we would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively. Please do get in touch with Menzies Wealth Management who will be delighted to meet with you to discuss ideas, opportunities and the appropriate action.