Changes in pension legislation – important considerations and opportunities
Posted on Apr.02, 2012 by awaller in Latest News, Personal financial planning
Reduction in the pension annual allowance
There is no limit on the amount you can save in a pension scheme, but there is a limit on the amount that can receive tax relief each year. The annual allowance is the maximum amount of pension savings you can have per year that will benefit from tax relief. This includes pension savings that you make plus any contributions from an employer.
At the beginning of the current tax year in April 2011, the Government lowered the annual allowance to £50,000 per annum. However, it is still possible to save more than £50,000 this tax year by carrying forward any unused annual allowance from the previous three years, which will alleviate any allowance charges.
The use of carry forward is a complex subject. To take advantage of unused allowance, contact us to speak with one of Generation Financial Services’ pension experts.
Removal of 50 percent tax relief on pension contributions from 2013
Chancellor, George Osborne, recently announced that the 50 percent tax relief on pension contributions will be left intact in this budget, but from April 2013 earners of more than £150,000 will see their maximum possible tax relief fall.
Following the 2012 budget announcements, higher rate taxpayers need to take advantage of the 50 percent tax relief on pension contributions while it is still available.
Speak to a Generation Financial Services pension specialist today to discuss your pension savings options.
Change in the pension age allowance
Millions of pensioners have been hit by a change in legislation to the pension age allowance, announced in the 2012 budget, which could leave them hundreds of pounds a year worse off. The policy changes will affect many pensioners, including our clients, who use their savings and investments to provide them with additional income to meet their day-to-day needs.
Under rules introduced in 1925, pensioners have had a higher personal tax allowance than younger people. From April 2012, the personal allowance for people aged 65 to 74 is £10,500 and, for those 75 and over, it is £10,650. Normally, these limits rise each year but, in this year’s budget, Chancellor George Osborne announced he is freezing them and will eventually bring them in line with the lower personal allowance for younger people.
Annual increases in income sources, such as the basic state pension, will gradually push more pensioners’ income over the tax threshold, and will cost pensioners £3.3 billion over four years.
According to a Treasury analysis of the policy, the poorest 40 per cent of pensioners will not be affected. Nor will the 10 per cent with the highest retirement incomes, roughly £25,000 and more. This leaves 40 percent of pensioners – more than 4.4 million – with mid-range incomes, mostly received from modest private pensions or returns on savings and investments, that will be affected by the change. In the financial year starting next April, 4.41 million pensioners will be worse off in real terms, with an average loss of £83 per person.
People who turn 65 or 75 next year will be the worst hit by the Chancellor’s decision to charge older people more tax. Those who turn 65 will be the biggest losers as they move into the age-related allowance system, suffering an average loss of £285 for the year.
Freezing the allowance will mean that 230,000 pensioners will be pushed into the income tax system for the first time next year because their income will rise above the threshold, a process known as fiscal drag.
However, the effects of the announced pension changes can be minimised. By ensuring the right investment structures are used – structures that do not affect the age allowance if income is taken – you can reduce the effect of the Government’s policy.
For more information on the changes to pension legislation and advice on pension investment options, contact us to speak to a Generation Financial Services pension specialist.