WELCOME TO CHARLES RUSSELL SPEECHLYS.
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There are only 2 weeks to go to the end of the 2013/14 tax year before the introduction of significant changes to the taxation of pension savings. This note explains the changes, what you can do to maximise the pension tax reliefs that are still available, and whether to register for protection.
The "annual allowance" is the cap imposed by law on the amount of pension savings that you, as an individual, are permitted to build up in registered pension schemes over the period of a single tax year without triggering an annual allowance tax charge.
The definition of "registered pension schemes" includes defined benefit (such as final salary) pension schemes as well as defined contribution (or "money purchase") pension schemes, and will include schemes offered by an employer and personal pension schemes. For the past two years the annual allowance cap has been £50,000. From April 2014 it is to be reduced to £40,000.
If the aggregate of contributions into your defined contribution scheme and the value of any increase to your defined benefit pension is more than £40,000 in the 2014/15 tax year, the annual allowance charge will be triggered. The excess will be treated as the "top slice" of your income for tax purposes. This could mean that the excess is subject to tax at a rate of as much as 45%.
The annual allowance is tested by reference to pension built up in any pension input period (PIP) ending in the relevant tax year. While most PIPs coincide with the tax year, not all do, and you might find that you are already caught by the new limit. If you have several pension arrangements, you could have more than one PIP.
On the brighter side, if you have unused allowances in the last 3 tax years, you may be able to take advantage of them to pay up to £200,000 this tax year, before the new limit comes into force. The amount will depend on what pension contributions you made in the previous 3 years.
The "lifetime allowance" is the cap imposed by law on the total amount of pension savings you are permitted to build up in registered pension schemes without triggering a lifetime allowance tax charge.
Initially the lifetime allowance was set at £1.5m and was increased for each subsequent tax year up to 2010/11. It remained at £1.8m until the 2012/13 tax year, when it was then reduced back down to £1.5m. In 2014/15 the cap is to be lowered further to £1.25m.
If the lifetime allowance is exceeded, you will pay extra tax when benefits are taken. The charge is 55% where the excess is taken as a lump sum, and 25% where the excess is being used to make taxable pension payments (on top of the income tax on the pension in the normal way). The tax consequences of exceeding the lifetime allowance are therefore significant.
Indeed, the coalition government has not ruled out further reducing the pension allowances, and both Labour and the Liberal Democrats favour a lower lifetime allowance. Labour also wants to make some further reductions to the annual allowance.
Deciding whether you exceed, or are likely to exceed, the allowance in future is not always easy. Accrued defined benefit (final salary) pension in particular may use up more of your allowance than you expect.
If your pension savings already exceed the lifetime allowance, or are likely to do so by the time you retire, there is some transitional protection which can help. This is Fixed Protection 2014, and Individual Protection 2014. Protection must be applied for within set time limits and will be lost if certain conditions are not met. Fixed Protection 2014 must be applied for no later than 5 April 2014. These requirements are complex so specialist advice is recommended.
If there is a risk that you may be in excess of either of these allowances in the next tax year, you may wish to:
Finally note that the changes mentioned above are those we know about today. Other measures may be included in this week's budget speech.
For more information, please contact Michael Jones on +44 (0)20 7203 8917 or email@example.com