Financial Advice

The apparently simple question of how much can I pay into my pension has never been more complicated to answer.

Maximising Pension Contributions

 

April 2017


The apparently simple question of how much can I pay into my pension has never been more complicated to answer.

Annual Allowance - The annual allowance was first introduced in 2006/7 and was set at £215,000, so rarely caused many problems in practice. It increased each year until it reached £255,000 in 2010/11, but since then it has been reduced to £50,000 then to £40,000. For personal contributions the maximum that can be paid, and qualify for tax relief, is 100% of earnings capped at £40,000 (the current annual allowance) but carry forward is available.

Carry Forward - The rules allow for the carry forward of unused annual allowances from previous years. This year’s annual allowance must be used first then unused allowances starting 3 years ago can be carried forward. There is no reference to earnings in these allowances, it is simply the annual allowance from the years in question. The calculation gets more complicated where there is also active membership of defined Benefit (final salary) schemes. For personal contributions there is still a limit of 100% of earnings. These rules apply unless you have a high income in which case they may be restricted by the new Tapered Annual allowance.

Tapered Annual Allowance - This year has seen the introduction of the tapered annual allowance. This restricts the annual allowance for individuals with adjusted income of more than £150,000 and threshold income of over £110,000. There are precise definitions of adjusted income and threshold income. All of the above is fine unless you have flexibly accessed your pensions in which case the money purchase annual allowance applies.

Money Purchase Annual Allowance - Pensions Freedoms were introduced in April 2016 and allowed those over 55 to access their defined contribution pension funds as a lump sum - 25% tax free the remainder subject to tax. At the same time the money purchase annual allowance was set at £10,000 per annum so anyone who flexibly accessed their pension funds could not then contribute more than £10,000 each year into pensions going forward. This allowance was reduced to £4,000 per annum from this year. Breaching these annual allowance rules incurs tax charges.

Annual Allowance Tax Charges - In simple terms if the annual allowance is breached then the excess is taxed as the top part of your income at 20%, 40% or 45% depending on other taxable income in that year. Some pension schemes operate a scheme pays system where the administrator can pay the charge from the pension fund.

Lifetime Allowance - The lifetime allowance is a limit on the total pension funds from which benefits can be taken without a tax penalty and is currently £1m. This may sound generous, however we are regularly seeing transfer values from defined benefit (final salary) schemes close to or in excess of this limit.

Advice - As I hope I have demonstrated, pension planning can be very complex and it is all too easy to fall foul of the rules and suffer tax charges. Good independent financial advice can help to avoid the pitfalls.

Mark Barr - FPFS Chartered Financial Planner / STEP Affiliate