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Pensions are rarely far away from the headlines, at least on the financial pages of the papers. The general theme is that we are consistently being urged to save more and take responsibility for our own retirement.
The cost of State pensions is inordinately high and when this is added to ever improving life expectancy, combined with the fact that current National Insurance contributions are possibly paying someone else’s pension now, you can see where things are heading.
As far as pensions are concerned, the Government does offer some reasonably generous incentives to save, but recent changes could mean that this is only up to a point for some people.
Tax relief is granted at your highest rate of tax on contributions you pay into a pension. Even if you aren’t a tax payer, tax relief at 20% is added to your savings up to an annual contribution limit of £3,600. However, the maximum amount you can pay into your pension each year and receive tax relief upon has reduced from a high of £255,000 in 2010/11, to the current limit of £50,000. This threshold further reduces to £40,000 from 6 April 2014.
That’s the savings aspect dealt with, but what about the retirement bit?
In recent years the Government has reduced the total amount that you can build up in your pension, regardless of the type of scheme. This amount is called the Lifetime Allowance and in 2011/12 an individual could have total savings of £1,800,000 and not trigger any tax charges. From 6 April 2012, this was reduced to £1,500,000 and from 6 April 2014, it will reduce again to £1,250,000.
These amounts seem very generous to most people and they are when you consider that the average size of an individual personal pension is currently £40,000 (Source: Moneyfacts 2 January 2014), but this applies to all pensions, including very generous final salary pensions that are paid to many government and public sector employees, including teachers, NHS employees, civil servants, etc.
The tax charge that will be payable by an individual who exceeds the cap of £1,250,000 after 6 April 2014 will be 55%, on any amount over the Lifetime Allowance paid as a lump sum, or 25% if the amount is taken as an income.
The majority of people do not know about this and those that do probably don’t think it will affect them. HMRC has estimated that only 30,000 people will be affected by this change immediately, but as many as 360,000 could be affected in future (Source: HMRC Press Release 2012 http://ow.ly/tduGs)
Below is an example of someone who could be caught by these changes - an individual in a defined benefits pension scheme.
If their annual pension plus tax free cash doesn’t exceed around £56,250 and they start to receive their pension benefits on or before 5 April 2014, it is unlikely they would exceed the current Lifetime Allowance of £1,500,000, so there would be no tax charge.
Just a few weeks later the position could be very different though. If their pension plus tax free cash is expected to exceed around £46,875 and they start to receive their benefits on or after 6 April they will almost certainly exceed the new Lifetime Allowance of £1,250,000. As a result there probably would be a tax charge. (Source: The Money Advice Service - Lifetime Allowance for Pension Savings).
Protection from the tax charge is available, but action would be required now to register for this and professional advice should be sought to ensure that any actions taken by the individual, whether deliberate or not, don’t result in loss of the protection claimed.
If you, a family member, colleague or acquaintance could be affected by these changes you may well benefit from a discussion with one of our financial planning consultants. Please contact us to arrange a meeting.
Peter Bouweraerts, Financial Planning Consultant
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