The proposed changes to pensions, around how individuals with high income (over £150,000) can use them to save for their retirement, open the door to some immediate planning prior to 5 April 2016, as well as some longer term rethinking.
Recap of the proposals due to be effective from April 2016
Briefly, as this has been covered before in Tax Voice August 2015, the key proposals mean that:
- individuals with more than £150,000 annual income will have the £40,000 annual pension allowance restricted by £1 for every £2 of earnings over this threshold, until a minimum relief of £10,000 is available (at income of £210,000 or more); and
- the maximum amount which can be saved in a pension will be limited to £1m, although this limit is due to increase in line with CPI from April 2018 onwards.
Post April 2016 planning possibilities
Pre April 2016 planning has been covered previously and still remains valid. But what about the future and the alternatives for those who will be otherwise restricted?
Firstly, do you need to worry about the restriction on pension contributions? Depending on how many years to retirement and the current value of the pension pot, individuals may already be subject to the lifetime allowance cap with no further contributions? For example, a current pot of £230,000 growing in real terms at 5 per cent per annum would exceed £1m in around 30 years.
Secondly, if your life assurance payments are treated as pension contributions on which you obtain tax relief, the lump sum paid on death counts towards the £1m limit and could give rise to a tax charge. If you do not want any lump sum payment to utilise some or all of your lifetime allowance, you should consider re-arranging your life cover outside a pension scheme, either by taking out a standalone life assurance policy or perhaps join your employer’s excepted group life assurance plan.
Alternatives should then be considered.
For those with their own businesses or investments wrapped in a suitable structure (offshore bond, personal investment company, etc) it may be possible to have some future years where income is below the £150,000 threshold, so that the annual restriction is not applied.
Alternative planning options
In the previous article, referred to above, it may be possible to maximise pension savings for a spouse with lower income who is not subject to any annual allowance restriction. There are a variety of methods of doing this, provided they have income and, in some cases, this need not be earned income.
For those looking to help adult children with their finances, there is often the desire to balance gifts to them while ensuring they do not have immediate access to funds. Parents may consider an arrangement which ensures a gift is paid into their working child’s pension fund so that the child receives tax relief. This could allow three benefits:
(i) It could generate a useful repayment of the tax paid by their son or daughter on their income.
(ii) It would provide a way of ensuring no access to the savings until at least age 55.
(iii) It provides a good way for parents to make inheritance tax efficient gifts provided they survive for at least seven years after the gift.
Per the example above, it may be that the child’s entire pension savings can be organised via a few years of parental gifts when they are in their early years of work and compounded growth thereon.
Alternative savings arrangements should be considered, apart from pensions. While no tax relief on contributions may be available, other arrangements are likely to offer more flexibility in access to the funds, a broader range of investments and may also offer a similarly benign tax status. This may include, individual savings accounts (ISAs), personal investment companies or other arrangements for ‘wrapping’ investment savings.
While the proposals on pension changes may initially appear unwelcome, there is a host of alternatives, but they do require consideration pre 6 April 2016 to ensure the most effective route can be taken.
Finally, it is worth noting that the proposals are not yet law and changes could still be made prior to 6 April 2016, the date from which they are due to be effective.