Pension changes adding confusion and opportunity!

One of the key changes in Rishi Sunak’s budget back in March was to that of savings, in particular pensions. These took more of a backseat in terms of pressing news given the emerging COVID-19 crisis at the time but are vitally important to anyone wanting to make financial provision for the future.

A surprise increase of £90,000 in respect of both the ‘threshold’ and ‘adjusted’ incomes for pensions, and a new lower contribution limit for those with earnings of over £300,000, were announced. So, what does this mean for you and your current pension plans?

The position prior to April 2020

The maximum contributions that most individuals could pay into their pensions on an annual basis was the lower of earnings or £40,000. This is aside from ‘carry forward’ unused relief from previous years.

However, your allowance was reduced by £1 for every £2 that your ‘adjusted income’ exceeds £150,000. Adjusted income is your total taxable income (earnings, benefits in kind, investment income etc.) plus any employer pension contribution. This means that an individual with adjusted income of £152,000, had an annual allowance of £39,000 and so on. The allowance bottomed out at £10,000 for individuals with income of £210,000 or more.

There was a further test based on ‘threshold income’ – both tests needed to be failed for the level of annual allowance to be reduced. Therefore, where an individual’s threshold income was £110,000 or less, then their annual allowance would not have been reduced, regardless of the level of their ‘adjusted income’. Threshold income is broadly the same as adjusted income except that pension contributions (both those made personally or by the employer) are excluded. This presented an opportunity to do a large one-off contribution to make use of carry forward and the full unrestricted annual allowance for the year of the contribution.

Changes effective from April 2020

Threshold income increased from £110,000 to £200,000 and adjusted income from £150,000 to £240,000.

This means that if you were to have a total income of £220,000 your annual allowance for pension contributions prior to the changes would have been £10,000. This increased in April to £40,000, which is tax-relievable at your highest marginal rate.

However, if you have a total taxable income of over £312,000, your annual allowance dropped from £10,000 to £4,000 with a tapering of the allowance if your income falls between £240,000 and £312,000.

The changes were primarily introduced to prevent workers within the NHS being penalised, in respect of the rates at which their pensions accrue. However, it also increases the tax planning opportunities for individuals whose income levels fall within the affected brackets and highlights the importance of utilising tax-efficient savings wrappers (such as pensions and ISAs) each year.

Financial planning for children’s futures

Maximum annual contributions to Junior ISAs and Child Trust Funds have also changed, increasing to £9,000, so there are more opportunities for parents and grandparents to help children accrue tax-efficient savings.

We are here to help

Given that it has been less than five years since the previous rules were introduced, these changes have the potential to further confuse savers. As such, it highlights the importance of taking advice from a suitably qualified professional to ensure correct understanding.

Mercer & Hole are here to help you navigate the complexities of pensions and financial planning. If you would like to discuss your pension options please contact me or a member of our Financial Planning team.