Navigating the annual pension maze…
Happy (Pensions) New Year to all of our clients, colleagues, friends and readers!
It just wouldn’t feel like January without a new chapter of pensions rules to get our heads around and navigate for our clients.
Without going into all of the detail here I thought it might be useful to just give a flavour (thank goodness for that I hear you sigh!). Perhaps you might spot an opportunity or a pitfall which might effect you or your clients. If so, why not get in touch?
There are three issues to grapple with this time around as I see it. I’ve tried to keep the jargon to a minimum, but some are going to have to bear with me here!
1. The reduction in how much high earners can save into pension (‘Annual Allowance’) post April 2016.
The amount one can contribute is reducing from the current £40k annual limit for those earning over £150k from April.
This reduction will be on a £2 for £1 basis (down to a minimum of £10k) which means that for those earning £210k or more, their allowance will fall to £10k.
What can I do?
For those who contribute on an ad-hoc basis this change needs to be carefully considered and managed.
For those who make their contributions on a monthly basis or enjoy high levels of regular employer contributions, it makes sense to consider a reduction in the regular amounts now to avoid exceeding their allowance and avoid a potential penalty in the next tax year.
To add to the complexity, unused historical allowances will be available to offset against any over-contributions. These can be complex in their calculation however, and some will have used up this ‘carry forward’ historical allowance.
2. A reduction in the amount of allowable total pension funding (‘Lifetime Allowance’) post April 2016
The total amount of pension funding allowed without triggering a tax charge is reducing from £1.25m to £1m from April 2016.
What can I do?
It is not all bad news on this front, those who fear that they will breach the new £1m limit can protect their lifetime allowance at £1.25m with the quid pro quo being that they agree to make no further contributions or accrue any further within their pension schemes (referring to final salary/defined benefit schemes).
We have had a reducing annual allowance for a while now and are well versed in adjusting our clients pension flight paths to keep them away from breaching their allowance and applying for the various protections where appropriate.
There are a few techniques we can bring to bear here such as reducing risk in the pension portfolio or adjusting contribution amounts.
3. A short term window of opportunity for a few before April 2016?
In an attempt to prepare the ground for the reduced annual allowance referred to above, there is a little wrinkle in the rules which may be attractive to some. For those who have made contributions between 6 April and 8 July 2015 there may be an opportunity to contribute up to another £40k before 5 April 2016.
The attractiveness of such a contribution is of course limited to affordability and the availability of income against which to offset an additional contribution to reclaim the tax relief.
Nevertheless for a few investors this will be a very attractive prospect particularly considering that they will in lots of cases be the ones facing a cut in their ongoing annual allowance from April 2016 as explained above.
Staying on top of legislation changes is just one of the ways we manage risk with respect to our client’s financial plans. The rules are complex, which is why we take our Continuing Professional Development commitments very seriously and insist on the very highest levels of qualification standards in our advice team.
It is one thing to understand the rules but really powerful insight can only be obtained through understanding the application of the rules, the impact on a client’s financial plan and how best to maximise allowances or minimise the impact of penalties.
It is our firm belief that a financial planner is uniquely placed to lead the navigation through what can at times feel like a very complex maze.
If any of the issues in this post strike a chord with you or you would like to hear more about our Personal Finance Director Service, why not get in touch?