How to get the most from your pension

Michelle Holgate

Associate financial planning director

With many factors to consider when reviewing your pension, financial planners can ensure that you get the best deal that's right for you.

By reviewing your finances with a financial planner, they can ensure that you are maximising any tax relief available, minimising the impact on yourselves or your family of tax charges and any loss of pension benefits in the future.

 

Discover the planning opportunities that are often overlooked when deciding on how you can best plan for the future:

 

Would your death in service benefit take you over the lifetime allowance?

The Lifetime Allowance (LTA) currently stands at £1,030,000* for the 2018/19 tax year and is set to increase by the Consumer Price Index each year. Many remain unaware of how their death in service benefits would be treated and whether, on death these would be deemed to use some of their LTA in addition to the value of their pension scheme.

 

A large proportion of death in service benefits are established through and therefore would count towards the member’s LTA on death in service. This is often not considered when individuals review their personal arrangements to consider how close they are to the LTA.

 

Tax charges may therefore apply to the beneficiaries that had not been anticipated. The reduction in LTA from its peak of £1.8m in 2010/11 has made this relevant for many more individuals. Some companies have made changes to their death in service schemes to ensure that they are "excepted" group life policies and not linked to pension schemes.

 

However, a large proportion remain via a registered pension scheme with the consequences as highlighted above.

 

Last Year for high earners to use higher annual allowance for carry forward

The maximum contribution that can be made to a pension and obtain tax relief at the marginal rate is 100% of UK relevant earnings up to a maximum of £40,000 per annum. This in turn, is subject to the annual and carry forward allowances or the money purchase annual allowance.

 

Individuals with adjusted income of over £150,000 and a threshold income over £110,000 will have their annual allowance reduced by £1 for every £2 they are over the adjusted income. The maximum reduction imposed would see the annual allowance falling to £10,000 (for those with an income of more than £210,000).

 

This greatly reduces the tax relievable contributions that can be made into a pension. Carry forward is available to allow you to use any unused annual allowance from the previous three tax years provided you were a member of a registered pension scheme during that period.

 

You must first utilise the current year’s pension contribution and then the oldest of the previous three tax years i.e. the 2015/16 tax year. Based on the assumption above, that the individual has been subject to the tapered annual allowance since its introduction, their tax relievable contributions each year would be as follows:

 

  • 15/16 tax year £40,000
  • 16/17 tax year £10,000
  • 17/18 tax year £10,000
  • 18/19 tax year £10,000

 

When considering carry forward of contributions it is worth remembering that it is not possible to receive tax relief for total pension contributions in excess of current year UK relevant earnings.

 

Assuming that an individual has each year had their annual allowance reduced to £10,000 since its introduction in the 2016/17 tax year, then this year would be the last year where carry forward allowance would be available at the higher level of £40,000 in relation to the 2015/16 tax year.

 

The calculations for adjusted and threshold income is often believed to be solely earned income. However, both include taxable income from all sources:

 

  1. Adjusted income is calculated by adding your income from all sources, plus any pension contributions made by individuals or their employer.
  2. Threshold income is calculated by adding your income from all sources, less gross pension contributions plus income received via salary exchange agreements.*This is the standard LTA for those that have not applied for pension protection.

 

National Employment Savings Trust (NEST) – would your pension be subject to inheritance tax?

NEST has been heavily criticised for not allowing trustees full discretion when considering who should receive a lump sum death benefit from a member’s pension. As a consequence of not having discretion, the value of the lump sum will be counted as part of the individual’s estate for inheritance tax purposes on their death.

 

Given the ability to now transfer existing pension schemes in to NEST, this could prove to be detrimental to many more members. If your estate is worth in excess of your inheritance tax nil rate band(s) either before or after the addition of the funds held in NEST, then any excess would be subject to a 40% inheritance tax charge.

 

It is important to regularly revisit your pension arrangements to ensure that if flexibility is important to you then it is available.

Most other pension schemes automatically have trustee discretion in place. This only re-emphasises the importance of regularly revisiting your pension arrangements to ensure that if flexibility is important to you then it is available. Many pension schemes still do not offer the full flexibility of the new “pension freedom” rules introduced in 2015.

 

How long could you manage without your earned income? 

Many believe that their employer would look after them if they were unable to work due to sickness or accident and are surprised to find this can be a matter of weeks if indeed it is offered at all.

 

The level of cover provided also varies dramatically and may provide a much lower income than would be needed to meet even basic living. In addition, care is needed with regard to the definitions of the particular policy.

 

Many clients feel they would rely on their other assets such as savings and investments to fund any periods of sickness.

Many clients feel they would rely on their other assets such as savings and investments to fund any periods of sickness but just how long would this last? Periods of absence from employment could also affect savings into a pension for later life and therefore create a potential further financial impact.

 

Protection is a very important area of planning that can help ensure that your goals and aspirations for yourself and your family can still be met.

 

Legal information

This article is not intended to constitute personal advice and no action should be taken, or not taken, on account of information provided.

 

As stated in our Terms and Conditions for Financial Planning, tax legislation is complex and the levels and bases of taxation, and relief thereof, are subject to change. Although we may be able to assist you in tax computations, and any such tax information provided by us is given in good faith, we would recommend that any tax advice is discussed with your accountant/tax specialist prior to affecting any of the recommendations contained within this report. Please view our Terms and Conditions for further information in this regard.

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