Caroline Pepper, Pensions Consultant at NW Brown, writes:
It remains to be seen whether the additional tax measures mentioned in the last Budget are to be put in place and if so, when.
Pension saving has always offered appealing tax breaks but with restrictions as to how to access those savings at retirement. The new pension freedoms have removed almost all the restrictions (subject to your pension scheme rules) and preserved the tax breaks. Whether you are embarking on your career and have been auto enrolled into your first workplace pension or you are nearing retirement age and been fortunate enough to have accrued pension benefits either privately or via employer sponsored pension schemes, saving for retirement via a pension continues to be attractive.
Even if you don’t pay tax you can still contribute £2,880 and receive basic rate tax relief which means £3,600 will be invested.
For high earners pension tax relief is particularly attractive where careful planning can ensure that the personal allowance is retained.
But how long will this tax relief last?
For high earners, the Conservative manifesto promised to reduce tax relief on contributions. Currently, pensions savers can invest up to £40,000 a year or the equivalent of their earnings, whichever is the lower. You can carry over unused reliefs from past years.
The maximum pension fund that you can take at retirement without suffering a tax charge is £1.25m (Lifetime Allowance). This reduces to £1m on 6 April 2016. Currently, funds of £1m or more can be protected providing no further payments are made. It is likely that tax reliefs will become less generous after the current tax year. Already higher earners and those with larger pension funds are looking at the alternatives to allow them to continue to provide for their retirement and many of our clients are now using more individually designed savings products.
What Next?
What is clear is that Dr Ros Altman will be seeking to deliver consumer fairness, with financial education and protection at the core.
As the pension tax benefits reduce, income in retirement is likely to come from a broader range of investment vehicles and tax efficient strategies. Seeking the best outcome from the new pension freedom rules will be paramount when passing on wealth to future generations.
In most cases, retirement planning is complex and requires careful consideration. The recently launched government independent Pension Wise service provides an impartial information service at no cost. You should also consider seeking independent financial advice before making a decision for which you may be charged a fee.
Please contact NW Brown & Company Ltd if you think you may be affected by the cap on contributions or lifetime allowance. All those who earn above the average or are in a public sector pension scheme are likely to hit this limit at the end of their working lives and if the current basis continues.
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