Cuts and adjustments made to the two main pension allowances since 2011 have made retirement planning all the more complicated.
In 2010/11 the lifetime allowance (LTA) – which sets the effective tax-efficient ceiling on the total value of pension benefits – was £1,800,000. Back then, the corresponding annual pensions allowances – which sets the effective tax-efficient ceiling on annual pension contributions – was £255,000.
At the time, dividing the LTA by the AA suggests that it would have taken about seven years of contributions at the rate of the AA to reach the then LTA, Hence, in theory at least, you could have deferred your pension planning until less than ten years before your actual retirement date.
In 2016/17 the LTA had fallen to £1,000,000, while the AA had a £40,000 maximum for most people. Now it would take 25 years to reach the maximum, again, based on dividing the current LTA by the AA and ignoring any investment growth.
These two calculations underline just how important it has become to start pension planning as soon as practical and keep making contributions each year.
Of course there is scope to carry forward unused annual allowances, but only for the previous three tax years. For example, you now have until 5 April 2018 to mop up any of your unused £50,000 annual allowance for 2014/15. However, you must first have exhausted the current tax year’s allowance.
In addition, if you are a high earner, from April 2016 you’ll have had a reduced (‘tapered’) AA if both the following apply:
- your ‘threshold income’ is over £110,000 – this is your income excluding any pension contributions (unless they’re paid as a salary sacrifice by your employer)
- your ‘adjusted income’ is over £150,000 – this is your income added to any pension contributions you or your employer make
Complicated?
To complicate matters further, the private sector final salary schemes and HMRC use different valuation bases, so a transfer could push you over the LTA even with no fresh contributions!
The constraints now applying to both the LTA and AA make regular reviews of your retirement strategy all the more important, particularly if you are considering large pension contributions during the new tax year.
Contact us to guide you through the maze – for professional pension advice.
Please Note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
Occupational pension schemes are regulated by The Pensions Regulator
