As the current tax year draws to a close many individuals will be looking to take advantage of the generous tax relief available on pension contributions. While this is an effective form of planning for many clients, care needs
to be taken to ensure that pension contributions and overall savings remain within the permitted limits.
Pensions tax allowances have been an easy target for the government in recent years and 2014 is no different. Both
the Annual and Lifetime Allowance are set to be reduced once again.
The Annual Allowance is the amount of tax advantaged pension saving that an individual can make in a single “pension input period”, not to be confused with the tax year itself. A pension input period is normally 12 months and the actual dates are decided by the pension scheme. Each pension input period relates to a specific tax year. The annual allowance has been on the chopping block for a number of years now, looking something like this over the past few tax years:
10/11 – £255,000
11/12 – £50,000
12/13 – £50,000
13/14 – £50,000
14/15 – £40,000
You are able to carry forward any unused allowance from the previous 3 tax years, although there are special rules relating to this facility for the 10/11 tax year.
People who are members of a final salary pension scheme are particularly vulnerable to the annual allowance.
An increase in salary or a pensionable bonus could easily cause a breach of the allowance and the subsequent tax charge. A series of complex calculations are required to work out the deemed contributions for a final salary pension scheme member. The input amount is not simply based on the payments made by the member, as many people wrongly assume.
Individuals with personal pension schemes will have an easier time making the required calculations, but could
still find themselves over the annual allowance without proper planning.
The Lifetime Allowance is the lifetime limit on pension savings that an individual can accumulate. The allowance was previously £1.8m. This reduced to £1.5m on 6th April 2012 and will fall again to £1.25m this year.
The penalties on any excess pension savings over the lifetime allowance are particularly severe, with the maximum tax charge currently standing at 55%. Once again, members of final salary or career average pension schemes should check carefully where they stand. An annual pension entitlement of £40,000 is an indication that further planning may be required.
There is a range of different protection schemes available which can reduce the impact of the changing lifetime allowance. Care should be taken however, because these protections usually come with some rather restrictive caveats.
Professional advice should be taken to establish your position against the annual and lifetime allowance and to ensure that you take advantage of all of the protections available to you. It can take some time to accumulate all of the information required to provide comprehensive advice in this area so clients should act without delay.