At EBS, we continue to highlight the benefits of pension savings, in all its forms. Personal Pension based schemes continue to benefit from some very favourable legislation, which make them one of the most flexible and tax efficient investment ‘wrappers’ available.
However, there have been some recent changes that you may not have noticed and we just wish to highlight some issues that may affect you. These changes also emphasise how important it is that you provide us with information concerning ALL of your pension arrangements. Any decision that you make concerning one plan could have direct consequences on another, so please do ensure that we are aware of everything you have.
If you own a personal pension based scheme (whether in drawdown or not), or any other type of pension, we urge you to read the information below. If you think that you may be affected by any of these matters, please contact us so that we can discuss and explain the options available.
Let’s start with the very latest change, announced in the Spring Budget.
- Frozen Lifetime Allowance
The Lifetime Allowance (LTA) is the amount of money that can be drawn from a pension scheme before a tax charge is made. This charge can be as high as 55% on funds in excess of the LTA.
The LTA was indexed to increase annually, by CPI, and currently stands at £1,073,100. However, it has now been frozen at this level until tax year 2025/26 and so more people are likely to be ‘caught’ by this.
It’s important to remember that the LTA is not a ‘cap’ on pension savings, just that any excess funds above the LTA will be subject to a tax charge when drawn. Further, it does not mean that pension contributions should necessarily stop (especially if they are from an employer) or that investment growth should be avoided to mitigate an LTA charge.
However, it’s a complex area and requires careful planning – ‘doing the right thing’ will very much depend on individual circumstances.
If you think you may be affected by this and would like to discuss don’t hesitate to get in touch.
- Retirement age changes
Some time back, the Government announced that in 2028 the minimum age that you could draw benefits from your pension would rise from 55 to 57. Whilst this is now becoming more relevant to people as they are planning their retirement, it’s not yet totally clear how the Government is going to implement the changes.
The Government consulted on this subject, with the consultation period closing on the 22nd April 2021. Following that, the government plans to publish draft legislation this summer and aims to include legislation to increase the normal minimum pension age to 57 in the subsequent Finance Bill.
It may be that this change will happen overnight on a fixed date such as the 6th April 2028, or it may be phased in, similar to the gradual increase in state pension age.
Depending on your age now, it’s important to be aware of this given that it may impact your retirement plans, especially if you are seeking to draw pension benefits early.
- Income Tax issues when initially drawing your Pension
The first time that somebody draws a (taxable) income from their pension, the scheme administrator is required to deduct income tax using the emergency tax code (1250L) on a Month 1 (M1) basis. In many instances, this will cause excess income tax to be deducted, meaning that less net income is received. Incorrect amounts of income tax deducted when a pension is first accessed can be frustrating, especially where a payment is needed for a specific purpose and the net amount paid does not cover what was required.
This is an issue that the financial industry has discussed at length with HMRC, and various solutions have been proposed. However, at the moment, scheme members will need to rely on making a manual tax reclaim if they want to recover any overpaid tax relatively quickly.
It is useful to have an awareness of how the PAYE system works and how to recover any overpaid tax, especially when looking to flexibly access a pension for the first time. This is, of course, something that we can help with.
- Annual Allowance
Annual Allowance is the amount of money that an individual can pay (or receive) into their pension each tax year and on which tax relief is available. The figure at present is £40,000 and anything in excess of that may be liable for an Annual Allowance Tax Charge. However, there are two instances when a potentially lower Annual Allowance may be applied and it is important that you are aware of these.
- Tapered Annual Allowance
This was introduced in 2016 but amended last year. It was put in place to restrict the level of contributions that could be paid into a pension by very high earners, and hence the tax relief paid. Broadly, if your taxable income from, all sources, is in excess of £200,000 you may be subject to a reduced or tapered Annual Allowance.
- Money Purchase Annual Allowance (MPAA)
This was introduced in 2015 under the Pension Freedom legislation and aimed to restrict the level of future pension contributions for those that had drawn taxable income from their pension. This reduced Annual Allowance was initially set at £10,000, but significantly, it was reduced to £4,000 in 2017.
The reason this is now more important is due to the increasing number of people who have ‘flexibly accessed’ pension benefits over the last 12 months. This may have been in part due to reductions or loss of income thanks to the pandemic. Whilst this is perfectly reasonable, they may not understand the implications of doing this, especially if they have an opportunity to return to the workplace and continue to make or receive pension contributions. If you have flexibly accessed a pension and drawn just £1 of taxable income then any future pension contributions in excess of the £4,000 MPAA are liable to a tax charge.
Just be aware………
As you can see, some of these changes could affect all of your pension plans and therefore it is crucially important that you make sure that we have complete information concerning your circumstances, plans and pension arrangements.
But just as importantly, the points listed above could potentially be mitigated with careful planning. This doesn’t just involve your pension planning but your wider financial planning too. It is not just whether your own circumstances/plans have changed but also whether legislative changes may have an impact.