Those potentially affected need to calculate the maximum contribution they can make just now. This will depend upon a variety of factors, including what other contributions have been made in recent years, the level of income in the current year, and the level of cash resources to fund any contribution. This potential contribution should then be compared, alongside the value of existing pensions, against the lifetime allowance. For some, a large contribution before April may be essential, but for others with large funds they may have insufficient lifetime allowance headroom.
What is changing?
The new pension freedom rules have only just come into place and these, along with the related death benefit changes, have made pensions a highly attractive place to hold your long term investments. However, George Osborne is about to make it much harder to build up a sizeable pension fund, particularly for those on relatively high incomes or who have already (very sensibly) made significant savings into a pension.
The July 2015 Budget either confirmed or introduced the following.
1) The lifetime allowance will be reduced, again, in April 2016 from £1.25m to £1m. It will be possible to retain the allowance at £1.25m, but only if no pension contributions are made after April 2016. Whilst even the reduced limit is substantial, there are many who may unwittingly be caught out. As an example, a 40 year old with a current fund of £250,000 and intending to retire at 65 could realistically be expected to breach the £1m limit even if they do not make any further contributions.
2) The annual allowance is the maximum amount of tax relieved pension contributions that can be made each year. This is to be reduced in April 2016 for those with incomes (including all pension contributions) over £150,000, from £40,000 down to only £10,000 for those with incomes over £210,000. This makes it very difficult for those impacted to accrue significant further pension benefits from that date.
3) The largest pension announcement was the launch of a green paper called "Strengthening the incentive to save: a consultation on pensions tax relief". The government will consult on whether and how to undertake a wider reform of pension tax relief. This is driven by a desire to reduce the overall cost of pension incentives, and also to distribute any incentives more evenly (currently higher rate taxpayers receive over two thirds of the relief). One option listed would be to effectively remove tax relief altogether.
4) There is one small positive change. Pension input periods (PIPs) are a more esoteric aspect of the pension system that many will not even be aware of, but the Chancellor has made several changes, some of which actually became effective on the day of the Budget. No-one should be disadvantaged, and those that made pension contributions prior to 8 July may find that they now have increased capacity to make further contributions between now and April 2016.
What does it all mean?
These all combine to present those individuals affected with a window, running to next April, to review their position and consider making a contribution to their pension. This would be to secure tax relief whilst it is still available, to make a contribution of a scale that will be much more difficult from April, and to leave open the option to cease contributions from April in order to retain a protected lifetime allowance.
It also means that other tax efficient long term investment options will need to be considered, not just pensions, in order to provide financial security in retirement.
Please contact us on the details below if you think you may be affected and would like a bespoke analysis of the options available to you before next April.