The date has been set for the next budget and the indications are that taxes are likely to rise. The looming budget is a good reason for some to review their pension arrangements, with speculation mounting that the Chancellor is planning to squeeze some of the generosity out of the current pensions regime. It is unlikely that any measures announced on 29 October will be implemented before the end of the financial year but it is not impossible.
We do not advocate panic financial planning, but some people may want to take steps very soon to take advantage of the current arrangements while they last. This is especially true of those earning over £100,000, because for every £2 you earn over £100k you lose £1 in personal allowance. The effect of this is that your marginal rate of tax between £100,000 and £123,700 is 60%. Putting that money into a pension is effectively saving you £14,220 in tax.
There may also be the opportunity to use salary sacrifice when making contributions – this allows you to sacrifice the money from your salary before National Insurance. This saves you 2% in national insurance contributions. It also saves your employer 13.8%, which many employers will add to your contributions.
There is speculation that the maximum £40,000 you can put in your pension may be reduced in the budget. Also, that the amount of tax relief you get – currently at your effective level of income tax – may be dropped to a lower flat rate. For high earners who are not close to breaching the £1,030,000 lifetime allowance, there is a lot to be said for pumping as much as you can into your pension now, while you still can.
If you have not maximised your pension contributions in the past three years, you also have a window of opportunity to carry forward the unused allowance into this year. That is another benefit that might disappear. If you have earned sufficiently, that means you could be in a position to invest £160,000 into your pension in one fell swoop, saving as much as £74,000 in tax.
There are several caveats. Perhaps the most important is the tapered allowance trap. This reduces your pension contributions allowance by £1 for every £2 your income – which includes earnings, rental incomes and other investment income – takes you over £150,000. It can get fiendishly technical but the tax benefits of paying into a pension and exploiting carry forward can be so substantial that it is worth taking professional advice and soon.
Another good reason for pumping money into a pension at the moment is that assets within a pension wrapper on your death are not counted when calculating IHT liabilities.
Pension planning should be part of a wider retirement funding strategy that encompasses both partners in any marriage or civil partnership. With smart planning you can significantly reduce the amount you both pay in tax while you are accumulating your retirement pots, as well as in drawdown.
We advise clients to review these arrangements regularly as your circumstances can change. And so can the tax regime – as we may be about to find out!
16 Oct 2018
This is not advice and you should not act on the content of this comment without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made of given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.
The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. Fluctuations in interest rates may affect the value of your investment. The levels of taxations and tax reliefs depend on individual circumstances and may change. You should be aware that past performance is no guarantee of future performance.