April 2016 Pension Changes
The effects of these changes will depend on your individual circumstances. You should always bear in mind that, just as these tax rules have come into effect this tax year, they can change again in future; you need to take account of that in any planning that you do. Additionally once contributions have been made to a pension, they cannot be accessed until age 55, rising to 57 in 2028.
Wide ranging flexibilities of the pension regime were welcomed in April 2015. However, further changes took effect this April aimed at reducing the cost of pensions to the government. We cover these below.
Tapering of the Annual Allowance for high earners
This measure restricts pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000 (where earnings excluding pension contributions are not less than £110,000). For those with income above £150,000, annual allowance is reduced by £1 for every £2 of income in excess of £150,000, until the allowance reduces to £10,000.
The impact of this is that all additional rate tax payers and potentially some at the top of the higher rate tax band will receive tax relief on lower levels of pension contributions, which could potentially be as low as £10,000, depending on their adjusted earnings. For example, a person earning £180,000 will have a £25,000 Annual Allowance, while someone earning £210,000 and over will have a £10,000 Annual Allowance.
Action to consider: Those with earnings and pensions contributions that exceed £150,000 may want to consider using their full £40,000 annual allowance this tax year (2015/16) whilst they are able to do so and so maximise the tax relief they receive.
Lifetime Allowance reduces to £1m
The Lifetime Allowance will reduce from £1.25m to £1m on 6 April 2016. There have already been a number of reductions in the Lifetime Allowance, which reduces the total value of pension savings that an individual can hold.
Those with total pension savings that fall between the current and the new lower limit or who believe that they will breach the new limit can protect their pension funds from the 55% tax that applies to amounts that exceed the Lifetime Allowance. This is a straightforward application to Her Majesty’s Revenue and Customs and details of the new arrangement are expected shortly. In the past a condition of receiving protection for the penal change has been that no further pension contributions can be made, and this needs to be taken into account.
It is still possible to protect pensions against the last reduction in the annual allowance to £1.25m. Applications need to be submitted by 6 April 2017.
Action to consider: If all your pensions – including the value of final salary schemes – exceed £1m then consider whether it is right for you to apply for protection. It can be complex to determine the value of all your pensions, so consideration should be given to consulting a financial advisor.