2015 Pensions Freedom – Flexible Access to Pensions
Over the last few years, pensions have been subject to significant reform as politicians have grappled with the challenges of an ageing population and reinvigorating a long-term savings culture. This year in particular has heralded a pension revolution as new rules came into force on 6 April 2015. The new pensions freedom included giving individuals access potentially to their entire private pension fund from the age of 55 (57 from 2028) and choosing how to take income during retirement.
Attractive Pension Death Benefits
In addition to the good news of being able to take potentially unlimited taxable withdrawals from a private pension from age 55 (different rules can still apply to many occupational pensions), pension death benefits are now much more attractive. The punitive pension death tax of 55% on funds in drawdown or on death after age 75 has been abolished – pension funds are now normally tax-free on death before age 75. Even after age 75, there is usually no Inheritance Tax (IHT) and beneficiaries can inherit a pension and just pay Income Tax at their marginal rate on any withdrawals. This makes pensions a very attractive part of IHT planning for individuals, subject to the Pension Lifetime Allowance of £1.25m (£1m from April 2016).
Further Pension Reform on the Cards
The Chancellor, George Osborne, has announced the outcome of a review of pension tax relief in the next Budget, expected in March 2016. Currently, pension tax relief is very generous – an individual can receive tax relief at their marginal rate of tax, up to 45%. Whilst this could continue, Mr Osborne has confirmed that he is open to further radical change, partly because pension tax relief costs the government £34b pa and much of this is paid to higher rate taxpayers.
Pension Tax Relief at Risk?
One option would be for the Chancellor to abolish or restrict higher rate tax relief on pensions. Whilst individuals earning over £150,000 potentially face a severe cap on pension contributions from April 2016, the Chancellor could decide to abolish higher rate tax relief on pension contributions, limiting everyone to 20% tax relief. Whilst this measure would save an estimated £7b pa, it could potentially discourage pension saving and would not act as an incentive to lower earners.
Another option which it is understood the Chancellor is considering, is a 33% flat-rate tax relief on pension contributions. This would have the obvious benefit of being simple and transparent, as well as encouraging lower earners and softening the blow for higher earners. It would also result in a significant saving for the government.
A final option for the Chancellor would be to cut the pension Annual Allowance further – this is effectively the maximum amount which can potentially be paid into a pension each year. The Pension Annual Allowance has been progressively cut from £255,000 in 2010 to £50,000 in 2011 and £40,000 from 2014. Whilst further cuts could be made to the pension Annual Allowance, we already know that individuals with an income over £210,000 will be limited to an Annual Allowance of just £10,000 from 6 April 2016, as will individuals taking pension benefits via Flexi-Access Drawdown.
Make the Most of Pension Tax Relief Now
Whilst it is impossible to predict if, how or when pension tax relief will be reformed or restricted, there is a general consensus that any changes would most likely make pension tax relief less generous for higher earners. Accordingly, we expect to see higher rate taxpayers make the most of the current system of pension tax relief while it lasts over the coming months before April 2016.
How Much Can I Contribute to a Pension and get Tax Relief?
To receive tax relief on a pension contribution, your contributions should not exceed your earnings in a tax year. The Annual Allowance of £40,000 also applies to most individuals (restricted to £10,000 Money Purchase Annual Allowance for individuals drawing pension benefits via Flexi-Access Drawdown) – this includes personal and employer contributions. However, it is possible to carry forward any unused Annual Allowance from the last three tax years, provided certain conditions are met such as having sufficient income in the current year. This means that it is potentially possible for a higher earner to contribute as much as £180,000 to a pension this year, at a net cost of just £99,000 assuming 45% tax relief.
Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change; we do not give tax advice. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk