Paradigm shift in pension allowances
2015/16 marked the beginning of pension flexibility for money purchase schemes. In the first six months following the reform over 380,000 pension arrangements were accessed under the new rules of which nearly 240,000 were fully encashed, according to the Financial Conduct Authority. The introduction of flexibility, radical though it was, is by no means the end to important pension changes.
We already know that on 6 April:
- The lifetime allowance, which effectively sets the maximum tax-efficient value of your total pension benefits, will be cut by 20% to £1,000,000. That may still sound a significant sum, but for a 65 year old wanting an inflation-proofed pension, £1m will only provide an inflation-proofed income of about £2,770 a month (before tax) at current annuity rates – and that with no provision for a widow(er)’s benefit.
- Two new transitional protections will be introduced to help those hit by the lifetime allowance reduction.
- The annual allowance, which effectively sets the maximum tax-efficient total pension contributions in a tax year, will be subject to tapering down to a minimum of £10,000 if you have a high income (broadly speaking over £110,000 after deducting any personally made pension contributions).
Even more significant is what we currently do not know. In July the Chancellor issued a consultation document on the future tax treatment of pensions. A report back was expected at the time of the Autumn Statement, but has been deferred until the Budget. The rumour machine is increasingly pointing to a reform which will replace full income tax relief with a flat rate relief between 25% and 33%. That could be good news if you are a basic rate taxpayer – it depends what else emerges – but it would obviously be bad news if you pay tax at the higher or additional rates.
A review of your maximum pension contribution options now is a clear priority if you pay 40% or 45% tax, or if the new lowered lifetime allowance could affect you. In theory it is possible, by combined use of the rules on carry forward and pension input periods, to contribute up to £180,000 with full tax relief in the current tax year, if your circumstances permit. In any event, 2015/16 is your last opportunity to carry forward up to £50,000 of unused annual allowance from 2012/13.
The question of whether to claim one of the new transitional reliefs must be put on hold for now, as the final details and claim procedures are unlikely to emerge until the summer.