Pension Investment Checklist

The Chancellor Rishi Sunak presented his second Budget on Wednesday 3 March 2021. Interestingly there were no major announcements in respect of pensions other than with reference to the individual pension Lifetime Allowance.

The lifetime limit sets the maximum figure for tax relief savings that an individual can build up over their lifetime.

The Chancellor introduced legislation to remove the annual link to the CPI increases for the next 5 years. This means that the standard Lifetime Allowance will remain at £1,073,100 for the tax years 2021/2022 to 2025/2026.

As we move into the new tax year, thought and careful planning should be given to making the most of the tax reliefs and allowances which are available. What follows is a summary of the main points to consider.

• When making personal contributions, your payments will attract tax relief at your marginal rate of income tax on gross contributions of up to 100% of your net relevant earnings (or £3,600 if more). Even non tax payers receive basic rate tax relief if the contributions are made for a pension operating relief at source such as a personal pension plan.
• Personal tax relievable contributions are restricted to your net relevant UK earnings which are earnings from an employment or trade only (dividends, rental income and interest do not count). This could be less than your annual allowance.
• Pension contributions are currently subject to an annual allowance of £40,000. This is the maximum that collectively you and your employer can contribute per tax year without you having to pay tax on any of the contributions.
• If you have sufficient earnings, or if your employer is making the contribution on your behalf, you and your employer can use unused annual allowances from up to the previous 3 tax years, provided you have a UK registered pension in those tax years. This is known as carry forward.
• If you don’t have any UK relevant earnings but are less than 75 years old and UK tax resident you can still contribute up to a maximum of £3,600 gross per annum, receiving tax relief at the basic rate (20%). The good news here is that you can also pay into someone else’s pension including your partner even if they don’t have earnings or a child or grandchild on the same basis.

What is the position if you are a higher earner?

• In April of 2016, the government introduced what is known as the Tapered Annual Allowance. Originally this meant that for the tax years 2016/2017 to 2019/2020, the standard Annual Allowance of £40,000 reduced by £1 for every £2 of your adjusted income above £150,000 (adjusted income is taxable income from all sources plus employer pension contributions).
• However, following the budget in 2020, the chancellor announced that the Tapered Annual Allowance limits were increasing for the 2020/2021 tax year. The threshold and adjusted income limits are now £200,000 and £240,000 respectively. This remains for the 2021/2022 tax year and there has been no provision made to adjust these figures following the last budget.
• The subsequent increases removed many people from being affected by the tapered annual allowance. For some very high earners, the position has however worsened as the minimum annual allowance after tapering is now £4,000 (instead of £10,000). This affects those with adjusted income over £300,000. Once adjusted income reaches £312,000 or more, the minimum annual allowance of £4,000 applies.
• If you have sufficient annual allowance (including carry forward), you may be able to make a personal contribution to reduce your income to £100,000 which will restore your tax free personal allowance in full (or any contribution that reduces your income below £125,000 will reinstate some personal allowance.
• If you benefit from bonuses, there may be opportunities to exchange a bonus for an employer pension contribution. This results in both employer and employee National Insurance savings whilst also offering the employee income tax savings and the employer, a corporation tax saving. The latter is likely to become more pertinent given the increases to corporation tax rates announced by the chancellor in the last budget.
• For business owners there remain opportunities in respect of pension contributions and the treatment of profits.
• For many directors, taking profits as a pension contribution can be an efficient way of drawing remuneration and reducing both their and the company’s overall tax bill.
• Additionally, there is no employer or employee National Insurance payable on pension contributions.
• If you are approaching retirement there are opportunities to boost your pension pot.
• Again, it is important to think about making pension contributions before you access your pension benefits. If you are looking to take advantage of the current rules and surrounding pension income drawdown flexibility for the first time, you need to avoid triggering the Money Purchase Annual Allowance. Once triggered, this will reduce the opportunity to fund a defined contribution pension tax efficiently, to just £4,000 annual with no ability to carry forward. There are similar rules in respect of the funding of defined benefit pension schemes and the implementation of the Alternative Annual Allowance again introducing a cap on funding.
• It is important to ensure that you take financial advice so that any planning undertaken is right for you and that you understand the full implications in respect of your overall tax position, wider financial planning arrangements and state benefits.

Please get in touch with our financial planning team should you require further advice and guidance.

*Albert Goodman Chartered Financial Planners is the trading style of Albert Goodman Financial Planning Ltd, which is authorised and regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate inheritance tax planning.