May 2019


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Tax year end pensions planning opportunities

26 February 2019

Tax year end, when everyone’s final income positions are becoming clear, is a prime time to do some pension tax planning, says the Prudential technical team.

Contributions, adjusted net incomes, taxable income, relief at source, net pay and extension of tax bands. All phrases involved in the identification and calculation of what levels of pension tax relief.

All phrases and concepts to strike boredom or disinterest to the average person in the street, one would argue.

Our average person in the street just wants to spend some money to meet a need of some sort. Spending, or cost benefit analysis, is fairly straightforward:

  • How much do I spend?
  • What do I get back?
  • What’s the return?
  • How long do I need to wait for it?

For a basic rate taxpayer making a pension contribution the answer to the first question would be £80, the second £85 (tax relief tops up to £100 less 20% tax on the amount after PCLS) and the third 6.25%. Question four? Whatever really but let’s say 5 years.

So that’s a 6.25% return averaging out at just over 1.22% over 5 years and 0.61% over ten years. Not the highest return. But what if you’re retiring this May? Would you wait 5 months for a 6.25% return?

Should tax relief not just be called “free return”?

And, therefore, the higher the relief you can get on your pension contribution the more likely you are to get a good level of “free return”. And there’s a boost where you pay a lower rate of tax in retirement.

The table above (click image to enlarge) shows different scenarios and what the return would look like. If you stayed in cash and your interest was higher than your charges you are essentially guaranteeing a minimum return. You could of course fully invest and lock in these minimum returns, if you had access to capital guarantees …

You might think the table above has some strange tax relief numbers though. Most will think of tax relief at either 20% 40% or 45 % but you do get other numbers.

You can only make pension contributions up to your relevant earnings. But the actual effective rate of tax relief depends on what type of income is receiving higher relief and whether you are getting to exit or mitigate any tax traps.

It’s probably best to interject here. I’ll do things using the rest of the UK rates and bands – no need to complicate things with the Scottish ones! The same principles apply though. Likewise, net pay contributions are broadly the same, notwithstanding the current “net pay outcry”.

Relief at source schemes

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