22nd July 2015 at 3:03pm
The Summer Budget brought a number of changes to pensions, with a combination of new rules most likely to affect those on higher incomes.
We highlight the major changes to help you understand how these might affect you and where there could be an opportunity to make the most of your pension planning.
If you think these could apply to you, we’d strongly recommend you speak to an expert to fully understand your options.
Pension input periods fall into line with the tax year
There’s been a change to what’s called the pension input period, or PIP. This is the timeframe you pay into your pension annually and all PIPS are being brought into line with the tax year, which runs from 6 April.
This is changing from April next year and should make pension planning easier.
However, there is going to be a transition period when things become more complicated as all pension input periods are brought into line.
This change could be very good news for some of you saving into your pension who may now be able to save more than £40,000 into your pension this year.
This can be a complex area to navigate and how it could affect you will depend on your individual circumstances, your existing pension input periods for all your pensions, and how much annual allowance you’ve used. There are also ‘carry forward’ rules which could allow you to pay in unused allowances from earlier years.
Make sure you’re aware of all the facts, how you could be affected, and what steps you might want to take.
The pension lifetime allowance is being cut
The lifetime allowance – the maximum pension you can build-up tax efficiently – is being reduced to £1m from £1.25m. This takes effect from April 2016.
This may mean a tax charge has to be paid in some specific circumstances on any pension savings which exceed that £1m limit.
With these changes just months away, the government is expected to make transitional arrangements for those who are already near or over this new limit which will give them some protection from the new tax charge next year.
If you think this could affect you, it makes sense to speak to an expert to see if you might make use of the transitional arrangements.
Pension annual allowance cut for higher earners
The annual allowance – the annual limit on contributions that you and your employer pay into your pension which benefit from tax relief – is being cut from April 2016 for high earners.
This will apply if you if you have an income of £150,000 or more, with your £40,000 annual allowance reduced by £1 for every £2 of income above that. If your income is more than £150,000, your annual allowance tapers gradually from £40,000 to £10,000 by the time it reaches £210,000.
This will reduce the annual allowance for some to as little as £10,000.
As ever, the devil is in the detail. For example, you may still be able to pay more in by making use of any unused carry forward allowances from past years.
The pension changes which combine to change the landscape from April 2016 create transitional opportunities to save more, and future restrictions on an annual and lifetime basis.
For high earners, navigating through this tax maze will be made easier by speaking to an expert to keep you on track.
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A pension is an investment. Its value can go up or down and it may be worth less than you paid in. Investment returns aren’t guaranteed. Past performance is not a reliable indicator of future performance. This blog and any responses are not financial advice.