Tax Year End Pension Planning – Important Changes to Pensions

This tax year end will see the introduction of a number of important changes to pensions. These changes will affect both the Lifetime Allowance for total pension savings and the Annual Allowance for high earning individuals.

Pension Lifetime Allowance (LTA):

The LTA will fall from £1.25million to £1million from 6th April 2016 and much like previous reductions in the LTA, the government has provided transitional protections – “Fixed Protection” and “Individual Protection.”

Your particular circumstances will determine whether or not LTA protection will benefit you. If you have already accrued substantial pension funds under Defined Contribution arrangements (such as personal pensions and SIPPS) and / or if you are entitled to benefits under a Defined Benefit Pension scheme (i.e. final salary pension), LTA protection may be of benefit to you.

Things to think about:

• HMRC will provide an online application process for LTA protection.
• However the online application process will not be available until July 2016.
• Despite the absence of the online application process, you may still need to take action ahead of tax year end if you want to qualify for LTA protection later.
• This is particularly relevant to Fixed Protection, where contributions to personal pensions or active membership of a Defined Benefit Pension Scheme can invalidate the protection.

ACTION: Despite the absence of the online application process, you may still need to take action now to avoid losing LTA Protection.

Pension Tapered Tax Relief

HM Treasury is seeking to reduce the cost to the Exchequer of Pensions Tax Relief. The changes (labelled “Pension Tapered Tax Relief”) will severely restrict pension contributions for high earning individuals. As of 6th April 2016, affected individuals may be limited to a pension contribution of £10,000 per annum (Standard Annual Allowance is £40,000).

How it works in practice
Individuals with “adjusted income” exceeding £150,000 will suffer a reduction in Annual Allowance of £1 for every £2 of income in excess of £150,000.  (Thus if your total income exceeds £210,000 in a tax year then your annual allowance will be restricted to £10,000).

As is often the way, the definition of “adjusted income” is not straight forward.  However in simple terms it will include your earnings, rental & savings income, employer pension contributions and in some cases personal pension contributions.

There is a further income definition known as the “threshold income.”  In very simple terms this means if your earnings are not ordinarily above £110,000, then you should not be impacted by pension tapered tax relief, even if your adjusted income exceeds £150,000.

Things to think about
You could consider making a large pension contribution ahead of 5th April 2016.

This could benefit you in a number of ways:

• Tax Relief at your Marginal Rate for Personal Contributions.
• Corporation Tax Relief for contributions made by an Employer.
• Utilise unused annual allowances from 2012/13 (£50K), 2013/14 (£50K) & 2014/15 (£40K).
• The recent pension reforms allow more flexible access to your pension benefits
  (including tax free cash) from age 55
• The recent amendments to death benefits make a pension fund particularly tax efficient from an IHT perspective.

It’s worth highlighting that Employer Pension Contributions are not restricted by your “Net Relevant Earnings” and contributions are governed by the “wholly and exclusively” rules, not your salary.

Put simply, if you are a business owner you may be able to make a large pension contribution, funded from your company profits, even if you have a low salary (Which may well be the case if your remuneration is structured primarily from dividends).

ACTION: Your opportunity to fund your retirement through pension planning is unlikely to get better and may become considerably more limited in the future – take action now!

Independent Financial Advice

The rules associated with the Annual Allowance and Lifetime Allowance are particularly complex and so we would recommend that you take advice from your Independent Financial Adviser (IFA) before taking action.

If you do not already have an IFA I would be pleased to put you in touch with my colleagues from Menzies Wealth Management who can provide you with specialist pension advice.