Are your pension savings tax efficient?

Mark Sheen looks at changes to the Annual Allowance.

As you may be aware, there is a maximum amount that can be saved tax-efficiently for retirement each year. This is known as the Annual Allowance and it governs all pension savings, including those made by an employer on an employee’s behalf.

The Annual Allowance is currently set at £40,000 (plus a carry forward allowance from previous years) but, from 6 April 2016, it has been subject to tapering for high earners. The results will be felt for the first time in January 2018, when the balancing tax payments for the 2016/17 tax year fall due. The changes will see an increase in the number of taxpayers facing a pension annual allowance charge.

How does the system work?

The standard rate of the annual allowance is £40,000, but can be reduced to a minimum of £10,000 in the case of high earners. The allowance goes down by £1 for every £2 of ‘adjusted income’ over £150,000. Adjusted income is total income plus the value of any employer pension contributions made on your behalf.

If you have an adjusted income of between £150,000 and £210,000, you will be affected by the tapered annual allowance. Those with an adjusted income over £210,000 will have a tapered annual allowance of only £10,000.

You may also be subject to a tax charge if the value of your overall pension pot exceeds the Lifetime Allowance.  This is the maximum amount that can be saved for retirement over the course of your lifetime, and it fell by £250,000 on 6 April 2016, to £1 million.

For those of you who have (or may have, on retirement, factoring in future contributions and investment returns) pension savings at – or close to this level – and who have not previously sought to protect your Lifetime Allowance, you can now potentially do so. You simply claim Fixed Protection 2016 (FP2016) or Individual Protection 2016 (IP2016).  The benefit of claiming protection is that a lesser proportion of pension savings should be exposed to Lifetime Allowance tax charges.

If you think you may be affected by the changes, it’s important to talk to your accountant or independent financial adviser and discuss the implications. Every individual will be in a different position and there will be no ‘one size fits all’ solution.