In his Autumn Statement the chancellor said he would cut the pension contribution allowance for some people. Thousands may be affected and, without careful planning, could face a substantial tax charge.
Once you access your pension, a £10,000 annual allowance can apply. It covers contributions made by you and your employer to ‘money purchase’ pensions (e.g. personal pensions and SIPPs).
The government plans to lower the allowance to £4,000. A consultation has been launched and the change could apply from 6 April 2017. Contributions over the allowance are taxed at up to 45%.
How little £10,000 in your pension currently costs
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The amounts depend on your circumstances and how much tax you pay. Tax rules can change.
Will I be affected?
The allowance applies if you’ve flexibly accessed your pension. This includes taking a lump sum since 6 April 2015 using the ‘uncrystallised funds pension lump sum’ option (where 25% of each lump sum is usually tax free and the rest taxed as income).
Everyone in flexible drawdown before 6 April 2015 will be affected. All other drawdown investors will be too, unless they have only taken the tax-free lump sum, or are in ‘capped’ drawdown and have not exceeded their income limit. £4,000 may not be sufficient for many. You could be earning more than ever, and tax relief and employer contributions count towards the allowance.
Investors with no immediate plans to retire should be aware of the change. Unexpected events such as a family wedding or redundancy could mean you want to access your pension early.
What if I want to make a withdrawal?
To retain the option of making larger contributions, you could consider:
- Taking up to 25% as a tax-free lump sum through drawdown and no income. Not an option in every pension, but it is with the Vantage SIPP.
- If your pension is worth less than £10,000, take it all as a lump sum.
- Taking a secure income. Exchange part of your pension pot for a lifetime annuity from an insurance company.
Alternatively, maximise contributions before accessing your pension. The annual allowance is £40,000, falling to as little as £10,000 for some higher earners. You can carry forward unused allowance from the last three tax years. Your contribution could receive up to 45% tax relief if it does not exceed the greater of your earnings or £3,600. Tax rules can change and benefits depend on individual circumstances. Once held in a pension money is not usually accessible until age 55 (rising to 57 in 2028).
What if I’m already affected by the £10,000 allowance?
The £4,000 allowance could apply from 6 April 2017. Consider using your current £10,000 allowance now – you can’t carry it forward so it will be lost if not used. To receive tax relief you must be aged under 75 and your contributions each tax year shouldn’t exceed the greater of your earnings or £3,600.
This article is not personal advice. We offer a range of information to help you plan your own finances and personal financial advice if requested. What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.
The government's Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options face-to-face, online or over the phone - more on Pension Wise »
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