More changes on the way for investing in your pension
QUESTION: I am trying to understand the changes that the chancellor made to pensions in the summer budget, what were the main changes?
Answer: In the summer budget, the chancellor announced several important changes to pensions legislation. Firstly he announced a 'green paper' consultation on pension tax relief. Currently, pensions are given tax relief at source so if you're a basic rate taxpayer, for every 80p you put into your pension, the government adds 20p.
Generally, investment gains within a pension are also tax free however everyone taking income out of a pension pays tax on the pension income at their marginal rate of tax.
This system may be reversed, such that pensions could be taxed like ISAs. This would mean taxpayers contribute income that they have already paid tax on, and then they would be able to take it out tax-free, along with any growth generated within the pension. This however is only a consultation and not yet definite.
The second significant proposal announced was that anyone earning £150,000 a year or more will face a reduction in the amount of tax relief that they will receive on pension contributions.
Currently, most people saving for a pension can save £40,000 a year and receive tax relief on it (subject to not exceeding the lifetime allowance of £1.25 million, soon to fall to £1m). You can also use any unused portions of annual allowance from the previous three tax years.
From April 2016, anyone whose total income, pension contributions and employer pension contributions are over £150,000 in a year will get a reduced allowance, with the very highest earners allowed just £10,000 of tax relief.
The reduced allowance will be tapered. Anyone earning £150,000 will get the full £40,000 allowance. From there, the allowance tapers downwards, with people losing £1 of allowance for every £2 of income; this means anyone earning total income of £210,000 or more will only get £10,000 tax relief annually.
Those whose income (excluding pension contributions) is under £110,000 will be unaffected by these changes, even if pension contributions take them over £110,000.
Thirdly, a technical change has been made to Pension Input Periods or ‘PIPs' which splits the 2015/16 tax year into two mini tax years across July 8 2015. This can actually create an additional £40,000 pension allowance to give a £80,000 allowance in 2015/16.
Finally, the ability to carry forward unused allowances from the three previous tax years remains unaffected.
If you are considering making a significant pension contribution then you should seek advice from a pension expert before April 5 2016.
:: Janette Burns (j.burns@pkffpm. com) is associate director at PKFFPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.