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Pension allowances: the next steps

8 Dec 2015

3 minute read

Pensions have been the subject of major reform in recent years. This trend has continued into 2015/16, with further changes also planned from April. Here we explore some of the changes in more detail.

Tapering the annual allowance

The annual allowance – the amount that can be contributed into a pension each year and still receive tax relief – is normally £40,000 (2015/16). However, from 6 April 2016 the Government will introduce a taper to the annual allowance for those with adjusted annual incomes (including their own and their employer’s pension contributions) over £150,000. Under the changes, for every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000. To ensure this operates as the Government intends, pension input periods will be aligned with the tax year, although transitional rules are in place to prevent retrospective taxation (see below).

Alignment of pension input periods

The changes to pension input periods were announced in the Summer Budget on 8 July 2015 and came in with immediate effect. As a result, special rules apply during 2015/16 to determine whether the annual allowance has been exceeded.

All pension input periods open on 8 July 2015 are closed on that date, with the next pension input period running from 9 July 2015 to 5 April 2016. All subsequent pension input periods will be concurrent with the tax year from 2016/17 onwards.

The transitional rules are designed to ensure that individuals are not adversely affected during this alignment process by allowing an additional annual allowance entitlement for 2015/16. Consequently, savers may be able to receive tax relief on up to £80,000 of pension contributions for 2015/16, with a maximum of £40,000 being available for the post-Budget period. In addition, an individual may have unused amounts brought forward from 2012/13, 2013/14 and 2014/15 (see below).

The exact amount available will depend on a number of factors, such as the type of pension scheme, the pension input periods of each scheme and the timing of contributions. The rules are complicated and individuals should consult an expert for advice.

Carrying forward unused allowances

Where pension savings in any of the last three years’ pension input periods were less than the annual allowance, the ‘unused relief’ is brought forward, but you must have been a pension scheme member during a tax year to bring forward unused relief from that year.

Therefore in 2015/16, unused allowance may be brought forward from 2012/13, 2013/14 and 2014/15. The annual allowance was set at £50,000 in both 2012/13 and 2013/14, and was reduced to £40,000 for 2014/15 onwards. The unused relief for any particular year must be used within three years, but only after using the current year’s annual allowance.

Case Study

Alex is a self-employed plumber. In the three years prior to 2015/16 he has made contributions of £30,000, £20,000 and £30,000 to his pension scheme. As he has not used all of the £40,000 (2013/14 and prior years £50,000) annual allowance in earlier years, he has £60,000 unused annual allowance that he can carry forward to 2015/16.

Together with his current year annual allowance of up to £80,000 (dependent upon the transitional rules), Alex may be able to make a contribution of up to £140,000 in 2015/16 without incurring an extra tax charge.

Changes to the lifetime allowance

In addition to the changes outlined above, the lifetime limit, which sets the maximum figure for tax-relieved savings in a pension fund, will be reduced from £1.25 million to £1 million from 6 April 2016. Where total pension savings exceed the lifetime allowance at retirement, a tax charge of up to 55% may apply. The lifetime allowance will be indexed annually in line with the Consumer Price Index from 6 April 2018.

However, where an individual has significant pension savings, it may be possible to apply for protection. Two types of protection are to be available. The first is known as ‘fixed protection’ and will be of benefit if total pension savings are expected to exceed £1 million when the savings are accessed in the future. Fixed protection retains the £1.25 million lifetime allowance. A critical condition for this protection is that no further benefit accrual (i.e. further contributions) can occur from 6 April 2016.

The other protection is ‘individual protection’. This will enable savers to fix their lifetime allowance at the value of the fund at 6 April 2016, provided the fund has reached at least £1 million in value at that date. However, the value to be protected cannot exceed £1.25 million. Further contributions are allowed under this protection. The deadlines for a claim have been removed and a claim for Protection will be able to be made at any point in the future. 

The pension rules are notoriously complicated and individuals should seek expert advice to ensure that their savings are as tax-efficient as possible. Please contact Ed Gibson at Ed.Gibson@shawgibbs.com or call 01865 292200 for pension advice.  

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