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A person’s pension is often the most valuable asset after their home, but sadly it rarely gets the same level of attention as the roof over their heads. If the tax man wanted to take away a chunk of your home, like your garage for example, I dare say you would be up in arms on your front drive, barricading your property. So why don’t the cuts to pensions attract the same press? After all, it’s a share of your future retirement income, and today’s income for that matter!
There are more pension changes afoot, and, when it comes to pension changes, forewarned is forearmed. Higher earners now have a four-month ‘window’ to save into pensions before cuts to tax relief mean you pay a lot more tax for exactly the same thing.
In the Budget last March, the Chancellor announced that people earning more than £150,000 would receive a lower rate of pension tax relief from April 2016. In short, you usually have a pension annual allowance of £40,000; the maximum pension contribution you can receive tax relief on. For those earning £150,000 or more, this will gradually reduce down to just £10,000 for those earning £210,000 and above.
To put this into perspective, someone earning £210,000 would normally receive £18,000 tax back for a £40,000 contribution into their pension. From April 2016, this will fall to just £4,500, so these high earners, who are paying into a pension, will have a new tax bill of £13,500 to add to the mix, without them really knowing about it until it’s too late! I realise at this point lower earners are weeping for those poor higher earners, but this is more unfair than you may first think. Given that the pension will be taxed when you take the money out, it doesn’t make a lot of sense to put your money into an environment where you get no tax savings at the outset, and you get taxed again when you access your money. Its double taxation by any another name. It will therefore call into question whether it is worth you saving more than the £10,000 into pensions thereafter.
So, if you are a high earner, you may want to consider bringing pension contributions forward to maximise your tax relief now, and then reduce contributions after April when you’ll receive less tax back. After April, you may want to look at alternatives to pensions for savings over and above your new £10,000 annual allowance.
But it isn’t just the high earners that need to worry! The Chancellor has said that he has put off a big pension tax relief overhaul from this month’s Autumn Statement, but only until next year’s Budget in March. So if you are a higher rate tax payer, and especially if you are a 45% tax payer, now certainly is the time to be thinking about topping up your pension if you want to maximise the tax relief the Revenue give you, before the next attack. You could find that you pay dramatically more tax for the privilege of doing so after April 2016.
If you want to make a contribution of more than £40,000 you can, as long as you have not made the full contribution for the previous 3 years. You can carry forward unused allowances providing you have a pension of some sort, allowing you to make a total contribution this year of up to £180,000. You can claim tax relief on the whole contribution, as long as your earnings match or exceed the level of contribution. So why not make 2015/16 a tax year where you pay no Income Tax, by maxing out your pension?
It is an important time for pension savers, and in particular those people that are close to retirement. There has never been a more important time to seek good retirement planning advice from an independent financial planner.
Charlie Reading APFS
Charlie Reading is a Chartered Financial Planner who runs the successful Chartered Financial Planning business Efficient Portfolio. You can find out more about him here and also download a free copy of his book ‘The Dream Retirement: How to Secure Your Money and Retire Happy’ here.
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