However, it is important to note that if a person has accessed their pension pot using pension freedoms introduced in April 2015 then their annual allowance for pension contributions, other than those made to defined benefit schemes, is automatically cut to £10,000 and carry forward cannot be used. The government is consulting on reducing the £10,000 limit to £4,000 from April next year.
Reliable relievable
Some clients may be caught by what is colloquially called the personal allowance trap. For instance, if they have an adjusted income between £100,000 and £122,000, they will lose their current tax-free personal allowance of £11,000 at the rate of £1 for every £2 their income exceeds £100,000 – with an effective marginal rate of income tax of 60 per cent.
However, if they pay relievable pension contributions personally they can take their adjusted income below the £100,000 threshold, and therefore regain their personal allowance.
A similar tactic can be used for parents who fear being subject to the high-income child benefit charge. They could effectively lose some or all of their child benefit if they or their partner have an adjusted net income in excess of £50,000 a year.
Paying tax relievable pension contributions can take the individual’s adjusted income below £50,000 in a tax year so they can preserve their full child benefit.
While there is no limit on the value of pension savings that can be built up over a client’s life, if they exceed the lifetime allowance then they will be subject to the lifetime allowance excess charge on the excess above their threshold. The charge is substantial. It can be applied in one of two ways, or combination of the both – either 55 per cent if taken as a lump sum or 25 per cent if taken as pension income. The pension income will also be subject to income tax which, if the recipient is a 40 per cent tax ratepayer, will result in an effective 55 per cent tax rate.
If the value of a person’s pensions exceeds the current lifetime allowance of £1m, they need to ensure they have explored any options available that can mitigate a tax charge. For example, could they register for Individual Protection 2014, Individual Protection 2016 or Fixed Protection 2016?
The cut-off date of 5 April 2017 is important for people with large-value pension savings, because applications for Individual Protection 2014 will not be accepted after that date. If the value of their pension scheme savings on 5 April 2014 exceeded £1.25m they should consider registering for Individual Protection 2014. Applications can be made to HM Revenue & Customs (HMRC) online. The individual will need an HMRC online services account to do so, but one can be set up as part of the application. Importantly, they will need to have details of what their pensions were worth on 5 April 2014 and a breakdown of the amount. If the individual does not know this detail they will need to obtain it from their pension scheme.
