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Budget Pension Changes

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Last chance for top earners to claim up to £81,000 in tax reliefAnnual Allowance reset gives a £40,000 allowance for rest of tax year. Comments from Tom McPhail Hargreaves Lansdown.

Nearly half of  taxpayers can still claim up to £81,000 in higher rate tax relief this year. Higher earners should make the most of the tax relief while they still can. Annual Allowance reset potentiallygives a £40,000 allowance for rest of tax year Annual Allowance taper will potentially catch anyone with taxable income over £110,000

Consultation on Pension tax reform

Small business owners can use pensions rather than salary or dividends. Pension transfers consultation. Secondary annuity market development delayed by 12 months. Following on from yesterday’s Budget and subsequent analysis, here are some further notes which may be of use. Investors have a window of opportunity to make the most of pensions tax relief before the current system changes; none more so than top earners who have already been served notice and who can claim up to £81,000 in tax relief in the current tax year before having their allowance slashed next year.

Tom McPhail, Head of Pensions Research: “The Chancellor hit the reset button on the Annual Allowance for the current tax year, giving most people the opportunity to pay in £40,000 from today, even if they have already made contributions in the current tax year. He also spoke about making pensions more like ISAs, which would mean the loss of the upfront tax relief. Whilst we don’t know what the outcome of the consultation will be, the message is very clear; make the most of the tax breaks while you still can.” As part of the tidying up process, the Treasury has given most investors a new £40,000 Allowance for the rest of this tax year. From April 2016, the Annual Allowance taper will come into effect.

Annual Allowance for 2015/16 a £40,000 reset

Pension schemes all operate an administrative arrangement called Pension Input Periods, which mean that a contribution paid to a pension in one tax year could be tested against an Annual Allowance in a different tax year. They are the work of the devil and have no place in a civilised society. From 2016, they will all be aligned with the tax year, which will significantly reduce their influence, however between now and then, the transitional arrangements give everyone a new £40,000 limit unless they had already contributed more than £40,000 to their pensions between 6 April 2015 and 8 July 2015.  Employer contributions and the value of benefits built up in final salary pension schemes also need to be included.

For 45% taxpayers, there is the possibility of paying a £40,000 contribution between 9 July 2015 and 5 April 2016, plus a carry forward contribution of unused allowances from the past 3 tax years of up to £140,000. The total maximum contribution of £180,000 could benefit from tax relief of up to £81,000.

Tapering the Annual Allowance for higher earners

From April 2016, the Annual Allowance will taper down for those earning over £150,000; once incomes reach £210,000 they will only have an allowance of £10,000. I have put some details at the end of this note but in broad terms, work on the assumption that if your taxable income plus your pension contributions, any paid by your employer on your behalf and the value of benefits being built up in final salary schemes in 2016/17 take you over £150,000 then you are likely to be caught by the taper rules.

Pension  tax reform consultation

The answer to the question is: “save money on pension tax relief”; the question is, how does the Treasury go about it? This isn’t at all simple. If the Treasury simply started treating pensions like ISAs (as the Chancellor suggested in his speech) then it risks undermining the existing (and very important) incentives to make long term retirement savings, which is why this is a consultation and not a policy announcement. If reform is inevitable (and it probably is) then our preferred answer is something close to Steve Webb’s model of a flat rate incentive for all, combined with the abolition of the Lifetime Allowance.

Small Business owners may favour pensions over dividends or salary

For now at least, money paid into a pension is exempt from income tax and National Insurance. This could save 40% income tax, 13.8% employer NI and 2% employee NI. The alternative has been to pay money out in the form of dividends, however under the new system once the £5,000 exemption has been used up, any subsequent dividends will be subject to dividend tax at 7.5%, 32.5% or 38.1%, making the pension contribution option look relatively attractive by comparison.

Pension transfer consultation

Several weeks ago the Chancellor announced his intention to launch a consultation into the barriers and problems with the pension freedoms.  Tom McPhail: “The pension transfer system is still stuck in the last century. It is ludicrous that it takes days at best and very often weeks or even months to transfer a pension pot. There is also no longer any justification for punitive transfer penalties which deter investors from being able to exercise control over their own retirement savings.”

We look forward to seeing the consultation paper. It is also to be hoped that the consultation will revisit the vexed problem of Pot Follows Member, a policy which will unnecessarily cost investors £3.5 billion and which will undermine the Treasury’s ambition for investors to take personal responsibility for their own retirement.

Secondary annuity market delayed

We weren’t enthusiastic about this idea when it was first announced and whilst we have worked with the Treasury to help develop a broker intermediated market, we still have concerns about the risks of consumer detriment. The decision to delay the roll out of this policy from 2016 to 2017 makes sense and if it is not possible to develop robust and cost-effective consumer protections, then the policy should be allowed to quietly die.

The taper rules details

It will not affect those with threshold income of £110,000 or less.  Threshold income isbroadly;

Taxable income for the tax year plus

Employment income given up for pension contributions (ie salary sacrifice) on or after 9 July 2015. If threshold income is above £110,000 the taper will apply where adjusted income is over £150,000.  Adjusted income isbroadly;

Taxable income for the tax year, plus…

Excess relief under net pay and relief on making a claim, plus…

Net pay pension contributions plus…

UK tax relief on overseas pensions, plus…

Value of employer contributions, which are…

Money Purchase = value of contributions

Defined Benefit and Cash Balance = Pension Input Amount minus member contributions. If affected, the annual allowance will be reduced by £1 for every £2 that adjusted income is above £150,000. Max reduction is £30,000. Anyone with adjusted income over £210,000 will have an annual allowance of £10,000

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