Pensions – 2018/19 Tax Year End
In this blog mini-series, our Tax Partner, Terry Smith CTA ATT, provides his thoughts on a number of matters that should be considered prior to 5th April 2019. As well as confirming the details of allowances and forthcoming legislative changes, Terry also offers some advice to help clients make informed and timely decisions.
In this post, Terry provides an update and actions relating to pensions.
Other topics in this blog series:
- Income Tax
- Capital Gains Tax
- Property Assets
- Tax Advantaged Investments
- Inheritance Tax
- Charitable giving and GiftAid
- Annual Allowance
You can contribute £40,000 (gross) a year into a pension scheme. This can be increased if you did not use up your allowances in the preceding 3 years and were a member of a qualifying pension scheme. The standard annual allowance (AA) of £40,000 for pension contributions (the total of personal and employer contributions) is reduced by £1 for every additional £2 of an individual’s ‘adjusted income’ over £150,000 and can affect you if your income from all sources is over £110,000. Unused allowances from 2015/16, 2016/17 and 2017/18 can be brought forward and used in 2018/19. This can affect you unexpectedly if you are a member of a Final Salary (e.g. Defined Benefit (DB)) or Career Average scheme. Should you breach the rules and pay too much, you will be subject to an annual allowance charge. Payment of this charge is the individual member’s responsibility and will be charged at your marginal rate of tax. It can, however, be settled by the pension fund if the liability is over £2,000.
- Lifetime Allowance
If the total of all your pension funds is likely to be at or near £1m by the time you retire, you should seek urgent advice on whether opting for IP16 is appropriate.
Stakeholder pensions allow contributions to be made by, or for, all UK residents, including children and grandchildren from birth. Consider making a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even for those who do not have any earnings. You can also make pension contributions in respect of family members who do not work (i.e. have no relevant earnings) or cannot afford them. If you make contributions to your children’s pension schemes on their behalf, they get the tax relief and the payments are treated as reducing their taxable income, so it could help keep them below the £50,000 income threshold at which they can retain the child benefit. The earlier that pension contributions are started, the more they may benefit from compounded tax free returns.
- Pension Freedoms
The popular pension freedom reforms that launched in April 2015 mean that people can now access their whole pension pot at age 55 and spend, save or invest the money as they wish. Savers can withdraw the whole pot in one go, although you might mistakenly run up a huge tax bill, especially if you were only used to being taxed at the basic rate through an employer. By withdrawing large portions of your retirement pot, the outcome may be you move into a higher rate tax bracket.
- Flexible Access From Age 55
Pension investors aged at least 55 (rising to 57 from 2028) will be able to access their pension fund as a lump sum if they wish. The first 25% will be tax free and the rest will be treated as taxable income and will be subject to income tax at their marginal income tax rate. Basic-rate tax payers need to be aware that any income drawn from their pension will be added to any other income received, which could result in them paying tax at 40% or even 45%. You can also choose to take your pension in smaller lump sums, spread over time, to help manage your tax liability.
If you are in a Defined Contribution scheme (DC or Money Purchase), you should consider your options now and check what your scheme offers.
All the articles in this blog series have been written to provide general advice that relates to all our clients. If you have questions regarding your own personal or commercial circumstances, please contact a member of the team today.
The tax year ends on 5th April, but please be aware that some changes may come into effect on 1st April. Plan ahead.