Maximising pension allowances
7 April 2019
Daniel Hough, wealth management consultant, Mattioli Woods, looks at the issues for clients seeking options to maximise their pension for retirement through additional contributions.
As we know, the most you can personally pay into your pension (and get full tax relief) in a tax year is up to 100% of your relevant UK earnings, capped at £40,000 gross – however, it isn’t often you come across a client who can afford to continually maximise these contributions, be it either through their salary sacrifice arrangement and/or personal contributions.
More commonly, I see clients who would like to discuss their options as they have been in receipt of a recent windfall, whether it’s through an inheritance gift, house downsizing, or perhaps a larger-than-expected bonus payment. Plus, if clients do not have an immediate need for the extra money, or if they are thinking about the ‘bigger’ picture in retirement – this can lead to additional pension contribution discussions.
Carry forward calculations are extremely useful here, as they determine the scope for what a client can take forward as unused allowances from the previous three tax years. This can be an especially powerful tool if the client is looking to make a one-off large contribution and has a lot of unused allowances.
However, you will need to remember that – as above – for tax relief purposes, individuals can only contribute up to 100% of their relevant earnings. Therefore, a client with earnings of £55,000, for example, cannot make a tax efficient £90,000 pension contribution in the same tax year.
Peaking at £255,000 for the tax year 2010/11 before dramatically reducing to £50,000 the following year (and then to £40,000 from 2014/15), the annual allowance has been affecting more and more clients. More recently, a tapering allowance has been implemented for pension savers, depending on their level of taxable income. Therefore, clients with a higher income earning potential of more than £110,000 may now be penalised with how much they can save into pensions as their £40,000 annual allowance starts to reduce (it will be reduced by £1 for every £2 of ‘adjusted’ income the client has over £150,000). The maximum reduction will be £30,000, leaving the tapered annual allowance as £10,000 for all those with adjusted income over £210,000.
However, remember the tapered annual allowance will only affect a client if their‘threshold income’ is over £110,000 and ‘adjusted income’ is over £150,000.
What is ‘threshold’ and ‘adjusted’ income?
Threshold income is classified as your total net income for the tax year (including all taxable income such as salary, bonuses, rental income and pension payments), but deducting the gross amount of pension savings (where tax relief was given at source), as well as deducting any lump sum death benefits received from a registered pension scheme.
Adjusted income, meanwhile, takes threshold income further by allowing for employer pension contributions to be included – this will prevent clients from avoiding the tapering by exchanging salary for employer pension contributions.
Tapering planning (continued over)
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