It’s the pension last chance saloon

The end of the tax year is upon us. For pension savers this means the last chance to maximise their contributions, says Nathan Long, senior pension analyst at Hargreaves Lansdown.

It’s the pension last chance saloon

Pension savers have up to midnight on 5th April to maximise their contributions to offset this year’s tax bill. Unused allowances from three previous tax years can provide a useful boost for anyone wishing to heavily fund their pension, perhaps with an eye to potential tinkering in the Autumn Budget. Pension planning should not be viewed in isolation, a £3,600 pension allowance exists for those who are not earning, even children.

Those who have used the new pension freedoms will see the limit on any further pension contributions drop from £10,000 to £4,000. This means anyone affected who is still looking to squirrel monies away for retirement should act now, or lose out on valuable tax relief.

Those with large pensions should pay close attention to the last chance to protect their pensions from tax by using Individual Protection 2014. With up to £275,000 of tax saving it is well worth taking the time to see if you might qualify.

  1. Use it or lose it – maximise contributions to pensions

You can contribute all of your earnings from employment or self-employment up to a maximum of £40,000. If you want to pay in more, you can use unused contributions from any of the previous 3 tax years. But tax relief is not available on any contributions that exceed your earnings. This also has the effect of reducing this year’s tax bill for higher rate tax payers.

Anyone with adjusted income above £150,000 should beware the tapered annual allowance which reduces the maximum you can pay in – see below for an explanation of adjusted income.

  1. Carry forward unused contributions of up to £50,000 from 2013/14 tax year

Carry forward works by using unused contributions from the previous 3 tax years. For this tax year, the last of those carry forward years was 2013/14 which was the last year that the annual allowance was £50,000.

Delaying contributions to next year potentially risks a £10,000 drop in the amount that can be carried forward.

  1. Use this year’s pension allowances for their family

There are pension allowances for the whole family. Even those who are not earning can pay up to £3,600. That’s £2,880 personally and a £720 top up from the taxman, even if they pay no tax at all.

The £3,600 allowance also applies for children, so they can benefit from a tax uplift too using a Junior SIPP.

  1. Pay contributions of £10,000 for those who have used pension freedom, before it drops to £4,000

The annual cap on contributions to pensions for those who have accessed their pension under pension freedom (known as the Money Purchase Annual Allowance) is falling. By taking a cash sum where part was taxed as income or drawing income from an income drawdown policy, the limit is currently £10,000. However, savers should beware, from 6th April the limit will drop to £4,000 greatly limiting the saving capacity of those looking to squirrel monies away on the run in to retirement.

  1. Register for Individual Protection 2014 – a way for those with large pension savings to obtain a larger Lifetime Allowance

Lifetime pension savings are capped at £1 million, but a chance to secure a higher personal lifetime pension limit for those whose pensions exceeded £1.25 million as at 5th April 2014 expires at the end of this tax year.

This protection (known as Individual Protection 2014) enables pension savers to secure their own personal lifetime limit equivalent to their fund value as at 5th April 2014 – providing it was more than £1.25 million. The maximum personal lifetime limit available is capped at £1.5 million – equivalent to a potential tax saving of £275,000.

Higher earners and the tapered annual allowance

Adjusted income includes earnings from employment and self-employment, dividends, rental income & savings income plus the value of any employer pension contributions. For every £2 that your ‘adjusted income’ exceeds £150,000, the maximum you can pay into pensions could be reduced by £1.

So at £150,000 you have £40,000, but once your income exceeds £210,000 you are limited to a maximum of£10,000 in pension contributions.

 

Adjusted income Annual allowance
£150,000 £40,000
£170,000 £30,000
£190,000 £20,000
£210,000 £10,000
£250,000 £10,000

 

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