There are many opportunities for pension planning but the rules are complicated and there have been significant changes recently so do check the position before making any decisions.
The rules currently include a standard lifetime allowance of £1.25 million. This figure has to be considered when key events happen such as when a pension is taken for the first time. There is also an annual allowance of £40,000 which sets the maximum amount which can be invested with tax relief into a pension fund. The annual allowance includes employer pension contributions as well as contributions by the individual. Any contributions in excess of the annual allowance are potentially taxable on the individual. Due to changes aligning 'pension input periods' with the tax year, some individuals may escape a tax charge if annual contributions in 2015/16 are below £80,000 and significant contributions were made before 9 July 2015.
In addition, many individuals may have unused annual allowances from previous years which can be utilised. Where pension savings in any of the last three years were less than the annual allowance, the 'unused relief' is brought forward for use in the current tax year.
Unused annual allowances are only carried forward for three years but cannot be utilised before the current year's annual allowance is used up. But once the allowance for the current year is used, the unused allowance from three years prior is used first. Bear this in mind if a substantial pension contribution is being considered.
Tax relief is available on pension contributions at the taxpayer's marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. An additional rate taxpayer can pay £100 in at a cost of only £55. Indeed for some individuals, due to the complexity of the tax system, the effective relief may actually exceed 45%.
All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings. There is no facility to carry contributions back to the previous tax year.
Directors of family companies should consider the advantages of the company making employer pension contributions. Additionally, if a spouse is employed the company could make reasonable contributions on their behalf.
From 6 April 2016 the standard lifetime allowance is to be reduced to £1 million. For those with significant pension savings it may be possible to protect an increased pensions entitlement by utilising Fixed or Individual protection. Please contact us for details.
From 6 April 2016 the annual allowance will be tapered for those with adjusted annual incomes (including pension contributions) over £150,000. For every £2 of income over £150,000 an individual's annual allowance will be reduced by £1, down to a minimum of £10,000
Clearly, those with expected incomes above £150,000 should be considering using their available current year annual allowance and unused allowances from the previous three years.
We would be happy to advise you on your pensions position.