Member Article

Don’t be fooled out of a comfortable retirement

On 6th April the Finance Act 2015 takes effect. It brings in legislation which may have a material impact on the pension plans of the nation’s highest earners, directors and senior management. Equally, it also poses a threat to the final pension value for some middle-income earners.

Looked at alone, each of April’s new laws will have far-reaching effects. Taken together, they could have an adverse impact on peoples’ long-term financial futures in the form of:

• a £137,500 (1) tax liability if an individual, or their employer, make a single contribution into the pension in question after the 5th April, (this is because the pension could already be ‘full up’ under the new rules);
• an unforeseen tax bill of up to £13,500(2) for the coming financial year alone; and
• funding restrictions that could leave individuals up to £1million (3) worse off at retirement.

Secondsight, part of Foster Denovo Limited, has launched two e-books, to guide individuals and employers through the impact the changes to the tapered annual allowance and the reduction of the lifetime allowance may have.

Darren Laverty, employee benefits partner at Secondsight, comments: “Few people appreciate that the new tapered annual allowance legislation, which takes effect on 6th April, could lead to some nasty surprises for anyone with an income or ‘adjusted income’ of £150,000 +, which now takes account other sources of income including buy-to-let income, salary sacrifice and employer pension contributions.

“We urge people to consider - now - what their current situation might be and if their overall taxable income could be £150,000, or more after the 5th April.”

Our individual and employer guides provide a number of recommendations including:

• urging an individual to consider whether they need to seek financial advice to review their retirement planning;
• reviewing whether they could utilise any unused annual pension allowance. This can go back three years, so could deliver considerable tax savings;
• taking advantage of a one-off opportunity this year to potentially double annual tax-free pension savings - to tie in with all the changes;
• drawing up suggestions that individuals can raise with their employer around re-thinking their pension contribution strategy. For example, could the employer offer other savings mechanisms, provide a pension on a non-contributory basis, or consider alternative cash rewards, rather than a pension contribution.

Laverty adds: “In addition, people shouldn’t let the new reduced lifetime allowance of £1 million derail their planned retirement. A prosperous retirement is the result of careful planning.”

If people reading the guides think their pension fund(s) might breach the current lifetime allowance of £1.25 million and want to take proactive action to secure the higher lifetime allowance limit, they should seek financial advice as soon as possible so that they can decide whether they should:

1. Pause pension contributions.
2. Apply to the HMRC for ‘fixed protection 2016’ or ‘individual protection 2016’ as soon as they are available after April 2016.
3. Be aware of the pitfalls of changing jobs; these include the consequences of automatic enrolment and death in service contributions, which would undo the protection, creating a possible future additional tax liability.

(1) £137,500 is based on having £1.25m in the pension pot and being taxed 55% on the surplus cash. Figures are indicative and may change from the 2018/19 tax year. If within the lifetime allowance, a higher rate tax payer would pay lesser tax of £75,000.

(2) £13,500 figure is the result of an overpayment of £30,000 and being taxed at 45% on the £30,000.

(3) How big an individual’s pension pot could be in ‘today’s’ terms after 30 years of contributions of £10,000 per annum compared to £40,000 per annum. Forecast based on 5% growth per year and 2.5% inflation per annum. Figures are rounded to assist clarity.

This was posted in Bdaily's Members' News section by Darren Laverty .