The end of the tax year is speeding towards us. And now is the time to finalise your clients’ pension planning to make the most of the tax advantages this type of investment offer. But pensions being what they are, nothing is straightforward, and there are complex rules, as well as rumours, to negotiate.
Pensions are governed by two basic principles – how much you can pay in, and how much you can take out. The annual allowance limits how much people can pay into pensions and receive tax relief on the contribution. This is set at £40,000 for this tax year and you may want to check whether your clients have made full use of this allowance. But there are additional rules adding complexity.
First of all, not everyone is subject to £40,000 - the allowance could be lower for some. Those who have ‘flexibly accessed’ their retirement benefits (taken flexi-access drawdown or an UFPLS) are subject to a lower limit, the Money Purchase Annual Allowance (MPAA). Currently, this is £10,000. This has the potential to create challenges for those who have, for whatever reason, accessed some of their retirement benefits but continue to save into their pension. Pension providers need to tell anyone who has flexibly accessed their benefits within 31 days of the trigger date, and they need to tell all the money purchase schemes they contribute to within 91 days.
But the MPAA is due to cause more headaches next year when it is due to reduce to £4,000. The government has just consulted on who would be affected by this reduction, and we hope it decides to think again and keep the MPAA at its current level.
Higher earners may also find they can’t pay in the full annual allowance. Those earning above £150,000 (including pension contributions) will find their annual allowance is gradually reduced depending on their earnings to a minimum of £10,000. The tapered annual allowance is a tricky concept. For many – particularly the self-employed – they won’t know what their final earnings are until the end of the tax year. This means they might not know what their tapered annual allowance is and could easily over-contribute in a year, not receiving the full tax relief on the contributions.
Pension savers could use carry forward as a way of avoiding busting the annual allowance limit (whether that’s the full amount or the tapered one, but not the MPAA). Once they have used up this year’s full allowance, they can carry forward unused annual allowance from the three previous years, as long as they were a member of a pension scheme, and they have the earnings to support the contribution they want to pay.
Scottish clients should be aware that the higher-rate tax threshold in 2017/18 will be set at £43,000 (rather than the higher amount of £45,000 as it is in England, Wales and Northern Ireland). Paying a pension contribution reduces the amount of income on which the client will pay tax.
As well as helping them make the most of their annual allowances, you may also want to work with your clients regarding what pension benefits they can take out. 5 April 2017 is the deadline for those who want apply for Individual Protection 2014 to protect a personalised lifetime allowance of up to £1.5m. Any benefits in excess of this won’t be protected but an application can still be made.
The end of the tax year may also be the natural time for clients to apply for Individual or Fixed Protection 2016, if they haven’t done so already. There is no deadline for these applications, but it’s easier to establish the level of lifetime allowance now rather than later on.
Finally, rumours are still circulating that pensions tax relief will change – perhaps moving to a single rate of tax relief for all, or may be just tinkering with the current lifetime and annual allowances (including tapering allowance). Advisers and their clients may want to bear this speculation in mind. If they believe change is likely then they may want to increase pension contributions for higher rate taxpayers in the run up to budget day on 8 March.
Have you seen our tax year end tab on the platform yet?