Steven Hodgson, a Partner with Stockton-based Vintage Chartered Financial Planners…
The clock is ticking for Teesside’s business owners and high-earners to take advantage of a pensions investment opportunity before the door slams shut in April 2016.
Over the course of his last three budgets George Osborne has introduced several radical and dramatic changes to the rules on pensions. Some for the better and some not necessarily so.
While the Chancellor’s decision to give open access to our pensions has won plenty of headlines, high-earners need to act soon to avoid falling foul of one of Mr Osborne’s less well-publicised pensions amendments.
We have already advised many of our clients to take action now to protect their financial assets ahead of next year’s significant changes.
The best publicised change introduced by Mr Osborne concerns the new pension freedoms, with anyone aged 55 or over now given unrestricted access to their pension fund.
Where previously they could take only 25% as a lump sum, they can now draw down the whole pension pot or, if they prefer, draw it in stages. That freedom has certainly made pensions more attractive, although it should be borne in mind that only the initial 25% is tax free, with any amount over this being taxed as income.
Another less publicised but equally welcome change affected the tax charges on death. Under the old rules, once you’d starting drawing from the pension fund, the residual fund was subject to a punitive 55% tax charge on death before age 75. Mr Osborne didn’t just reduce that tax charge, he scrapped it.
That part of your pension isn’t part of your estate so it isn’t subject to inheritance tax. So the pension fund is now essentially an investment vehicle that is free of any underlying taxes – no income tax on interest and dividend income, no capital gains tax and no tax on death before age 75 – and we have unrestricted access from the age of 55.
So a pension is now much more attractive as a savings vehicle than it ever was.
But it’s not all good news.
It went under the radar, but the Chancellor also announced that, with effect from April 2016, the ‘lifetime allowance’ – the maximum an individual is allowed to accumulate in their pension fund – will be capped at £1 million, a reduction of £250,000 on its current level.
But it’s another new restriction, one that will affect those with earnings in excess of £150,000 a year, that we are keen to highlight.
Currently the ‘annual allowance’, which is the maximum that can be paid into the pension each year, is £40,000. Under the new rules, the annual allowance will be scaled back for high earners, specifically by £1 for every £2 of income in excess of £150,000.
That means anyone with a £210,000 annual income can pay only £10,000 a year into their pension. Despite the change having been announced back in July, I’m sure many of those who will be affected remain unaware.
Only a few years previously, business owners and other higher earners could potentially contribute, say, £1 million into their pension fund and pretty much retire the next day. That is no longer the case under the new rules.
The potential good news for astute savers is that they can carry forward unused allowances from the previous three years.
If you’re a business owner who hasn’t made pension contributions over the last three years, then you have scope to put in up to £150,000 during the current tax year – an opportunity that may not be available in the next tax year.
So if you’re a high-earner there’s an urgent need for some forward-planning in terms of funding your pension.
You’ve got until April 5 to make use of those unused allowances but the clock is ticking. It’s a case of use them or lose them! I’d strongly recommend that people affected by this should take advice sooner rather than later.