Every year, at this time of year, financial advisers remind their clients of the benefits of using up pension savings allowances which qualify for tax relief at the taxpayer’s top income tax rate.
This year this annual call to action could have greater significance for certain individuals who may see their future allowances fall.
This includes those who:
- Are planning to start drawdown on a flexible basis in the near future.
- Have already started flexible drawdown since 2015.
- Are planning an extended career break
- Are higher earners, with total taxable income in excess of £110,000 who currently receive employer pension payments
- Are approaching age 75.
If you are in one of these groups the amount you can save in pensions, with the benefit of tax relief, may be restricted or about to fall.
The government has already introduced rules restricting the relief available to these groups and is proposing a further reduction for those in flexible drawdown plans from 6 April 2017.
If you are not in one of the above categories and have earned income taxable in the UK, your annual allowance for pension savings with tax relief is £40,000 if your employer pays in for you.
If you fund your own contributions and are working it is 100% of your earned income up to a maximum of £40,000.
High earner restrictions
If your total income is more than £110,000 you may have a lower restricted allowance. If your total income plus employer pension payments are over £150,000 your allowance will be cut by £1 for every £2 you exceed £150,000 down to a minimum allowance of £10,000 once the earnings threshold of £210,000 has been breached.
Both the above categories of pension saver can also carry forward unused relief from 3 earlier tax years, once they have exhausted this year’s allowance. This uses up the earliest year first.
Career break or retired already?
Non earners, including children, can pay in up to £3,600 a year but cannot carry forward earlier years’ allowances. So non earners have to view this relief as a ‘use it or lose it’ allowance. You still get 20% relief even if you are a non taxpayer. Higher rate relief is available for 40% and 45% taxpayers.
If you are about to give up work soon, using your carry forward relief in a year when you still have taxable earnings could be beneficial. This will maximise the relief you can claim.
Aged 70 something
From age 75, no more pension payments can be made but funds can remain invested in the tax exempt pension plan beyond age 75. If you are still working in your mid 70s, any unused relief needs using up before you reach age 75.
If you have already accessed a pension fund using the flexible access rules introduced in 2015, further restrictions apply to future pension payments.
You can only pay in up to £10,000 or 100% of earned income if less, and you lose the 3 year carry forward of earlier years’ unused relief. The government confirmed in its 8 March Budget that it is cutting this allowance further to a maximum of £4,000 from 6 April 2017.
Using up any unused allowances prior to accessing your pensions on a flexible basis could provide a substantially larger fund for retirement. The proposed cut in the restricted allowance, following flexible access, means that dipping into your pension fund before you have fully funded your retirement needs to be approached with care.
If you need cash or income in an emergency or just for a short period of time, you may need to withdraw it in ways that do not trigger this restriction if you want to carry on funding your pension pot later with the benefit of tax relief.
- drawing a final salary pension
- just taking the tax free cash from your pension but no income
- generating the income from an annuity
- accessing a small pot under £10,000
These will not trigger the restriction of future pension saving allowances nor loss of carry forward allowance.
It may be worth taking advice on how best to access your pensions to avoid losing future tax relief on pension savings.
If you anticipate you may fall into one of the categories listed above, taking action now to use up pension saving tax relief could substantially improve your retirement fund. Saving with tax relief can boost your savings by 20%, 40% or 45%.