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Pension Ch-ch-ch-Changes

Written By: Mark Cooper on February 7, 2016 No Comment

changes aheadThe death of David Bowie last month, at an untimely 69 years of age, received huge media attention and rightly so, being surely the most significant passing of a hugely influential and ground-breaking singer/song-writer since the tragedy of John Lennon’s murder in 1980.

Music has the power to shape our lives, our thinking and our emotions and few have been a more powerful influence on my generation than David Bowie. May he rest in peace.

The title and catchline of one of Bowie’s most powerful and well known songs seems a perfect introduction to the remarkable barrage of changes about to hit UK Pensions right now, some already known and some subject to intense speculation as the March 2016 Budget approaches:

1. Lifetime Allowance Cut to £1 Million

Yes, it sounds a large figure still, being the amount of Pension benefit and/or fund that can be accumulated during a working life before a severe tax penalty claws 55% of any excess back.

For Defined Contribution Pensions, including Personal Pensions, it is simply measured by the size of the “Pot”, however for Defined Benefit Schemes (usually known as Final Salary Schemes) the Pension income is multiplied by 20, meaning that an annual Pension income in excess of £50,000 p.a. when taken (known as ‘crystallised’) will face a tax charge.

It will be possible to protect an existing uncrystallised Pension up to £1.25M in value by using one of the Pension Protections about to be offered, although the methods and deadline is still unhelpfully vague, showing how hastily this latest Government tax-grab has been introduced.

2. Annual Contribution Allowance

For most this is to remain at £40,000 in each Tax Year, measured by either the overall gross contributions to a DC/Personal Pension or again as a multiple of the additional benefit accrued within a Fnal Salary (DB) Pension Scheme – or an aggregate of the two for many. It is not as generous at it sounds.

Of even more significance for some is the introduction of tapering of Annual Allowance for those with incomes of £150,000 or more, to the extent that an individual earning £200,000 or more in 2016-17 will have an Annual Allowance, including employer contributions and/or benefit accrual will be just £10,000!

3. Tax Relief on Pension Contributions

As we sit right now, in early February 2016, personal contributions to a Pension Plan or Scheme attract income tax-relief at the highest rate paid (to the extent that it is paid) meaning 40% or even 45% tax-relief for many.

Chancellor George Osborne has already let it be known that this will be reduced, but by how much will only be known on the afternoon of 16th March 2016 when his Budget is announced.

Speculation is that a flat rate of tax-relief will apply to all, but at what rate? 25% possibly, or 30% if the exercise is more about parity than a tax grab. We shall see.

4. Pension Contributions through Salary Sacrifice

Most employer-sponsored Pension Schemes collect employee contributions through ‘salary sacrifice’ meaning gross contributions from gross salary, thus saving on Income Tax and National Insurance Contributions. Mr osborne doesn’t like this either……..

What to Do?

Firstly, be aware of these imminent changes and prepare to act accordingly. I have been talking about them at client review meetings since first known, with many taking the decision to contribute more now if means allow, but the real work starts after the March Budget when we will know the facts and deadlines.

The Government’s ill-fated “Pension Simplification” initiative introduced in 2006 (watered down from outset as it turned out) seems a lifetime away now….