Helen Tandy, Partner, Chartered Financial Planner, Castlefield Advisory Partners
There were no major changes to pensions in the Budget, apart from the introduction of Lifetime ISAs. Below is a summary of the previous announcements, taking effect from 6 April 2016, and the changes announced in the budget.
Reduction in Annual Allowance (AA) for high earners
The Annual Allowance is currently £40,000 for most pension savers.
Individuals with a threshold income of more than £110,000, and have adjusted income in excess of £150,000 will be subject to the tapered annual allowance.
The reduction is £1 for each £2 of income in excess of £150,000 (the maximum reduction £30,000).
A salary of £190,000 the excess is £40,000, the reduction in the allowance would be £20,000, leaving an allowance of £40,000 - £20,000 = £20,000 AA
A salary of £230,000, the excess is £80,000, the reduction in the allowance would be the maximum of £30,000, leaving an allowance of £40,000 - £30,000 = £10,000 AA
What is threshold income?
This is classed as all income (investment and earned) less reliefs, less gross payments to any pension paid by individual, subject to relief at source. (Need to take into account pension payments occur as a result of salary sacrifice if set up after 8 July 15, care must be taken as some schemes renew annually and therefore would be caught on the anniversary).
What is the adjusted income?
This is the above threshold income plus all pension payments regardless of source.
What is the impact?
The loss of tax relief, combined with payment of additional rate tax of 45%, can result in an effective rate of 67.5% marginal rate of income tax for those who loose the AA (income of £210,000 or more will loose the maximum AA)
Ask your adviser for more information on whether this may impact on your savings into a pension.
Lifetime Allowance (LTA) 2016/17
Transitional protections are available in the form of either:
Fixed protection 2016- where total benefits are already above £1m on 5 April 2016, for anyone likely to have pension benefits between £1m and £1.25m. Individuals who are under 75 years of age in receipt of drawdown benefits, when tested at the age 75 may exceed the reduced LTA. This protects benefits of £1.25m, but if an election is made, personal contributions must stop.
Individual Protection 2016- for individuals with current value between £1m and £1.25m, this uses the pension value/benefit as at 5 April 2016 as the protected level, but further contributions can still be made.
Individual Protection 2014- individuals can still apply for this option, the allowance is the lower of £1.5m or value of pension funds/benefit as at 5 April 2015, again contributions can continue.
For more information see our February blog… see more