The ever-changing landscape of Pensions; how to build a pension fund, maximise tax relief and help to avoid annual allowance and lifetime allowance charges
In this series of four articles, we look at how pensions have changed in the last four years, how much you can contribute to – and take benefits from – a pension in 2019/20, and consider what the future may hold for those looking to maximise their pension benefits.
It seems an age ago now when George Osborne took to his feet in the House of Commons on 19 March 2014 and first announced what were to become known as the ‘pension freedoms’. The consequences of these changes, which took effect from April 2015, have already been far reaching and the full effects will not be known for many years to come.
At a time when many people had already turned their back on conventional pensions and instead looked towards buy to let property to support them in their twilight years, the changes were largely viewed as a ‘carrot’ to encourage the public to contribute to and have more faith in pensions.
While the compulsion to purchase an annuity with a pension fund at some point had already been removed in April 2011, and most pension funds had always been free of Inheritance Tac (IHT) upon death, the changes introduced in April 2015 greatly enhanced the flexibility and appeal of the drawdown route; maximum income limits were removed for all (through Flexi-access Drawdown (FAD)), the previous punitive 55% tax charge on death while in drawdown was removed (which in turn made the IHT free nature of most pension funds a key benefit for those in drawdown) and the range of potential death beneficiaries was widened to include any nominated beneficiary, rather than just spouses and dependants. These changes gave unrestricted access to a pension fund (subject to income tax on withdrawals made via drawdown) and the ability to pass on the residual fund to future generations (or even non-family members) without inheritance tax or penalty (benefits received on death where the member is over age 75 are subject to the recipient’s marginal rate of tax).
However, what was given in one hand was (for some at least) soon taken away with the other. In July 2015, restrictions were announced to both the annual allowance (the maximum total amount that an individual (or others on their behalf such as an employer) can contribute to pensions each year without suffering a tax charge) for higher earners, and a reduction in the lifetime allowance (the overall value of pension benefits that you are allowed to accrue before facing a lifetime allowance charge of up to 55%) in a move that we described at the time as a ‘two-pronged attack’ on higher earners.
While the political landscape has altered drastically since then, the pensions landscape in the UK has (to date) remained remarkably unscathed. Speculation had been mounting for some time that changes would be made to further restrict the amount of tax relief granted to pension contributions, perhaps even to a flat rate of tax relief, regardless of your income. However, other than a few minor tweaks, in the 2018 Autumn Budget the current Chancellor, Philip Hammond, chose to leave pensions alone.
At the time of writing, the outcome of the Brexit negotiations was far from clear, and it could be that future Chancellors are left with little choice but to raid pensions to help balance the books. But for the time being, it is ‘business as usual’.
It is worth remembering that the availability of pension tax relief for high earners is already considerably less than just a few years ago. In 2010/11, an individual could contribute up to £255,000 gross to their pension and receive tax relief at their marginal rates (provided they had pensionable earnings of at least an equal amount). Only six years later, that same individual would have been restricted to a maximum tax-efficient gross pension contribution of just £10,000.
Understanding the various pension allowances is an important part of your retirement planning and overall lifetime financial planning.
Paradigm Norton is a financial planning firm that can advise and guide you with your retirement and pension planning. To speak to one of the team, call us on 01275 370 670
Tax legislation is subject to change and depends on individual circumstances.