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Pension planning - Autumn Statement

The announcements in the Summer Budget 2015 were to be followed with a consultation on the pension tax relief system. Although we still await further details around this consultation, it may well have a significant impact on the way in which pensions are used as part of an overall planning strategy.

So far there is no further update on the consultation, which means high earners are still able to take advantage of higher and additional rate tax relief on the payment of pension contributions. However, it is important to remember that forthcoming tapered annual allowance will restrict the ability to make large contributions for those with income in excess of £150,000. Income over this level will reduce the annual allowance by £1 for every £2 of income, with a maximum reduction of £30,000. This means that those with income of £210,000 will have an annual allowance of £10,000.

This is especially the case for pension investors with income in excess of £100,000 per annum, at which point the personal allowance begins to be eroded.  The illustration below shows the tax relief received and the effective cost of a pension contribution for an individual earning £121,200 i.e. exactly the threshold where the personal allowance is lost in full. By making this pension contribution their personal allowance will be restored and the effective rate of tax relief is a staggering 60%!

Earnings £121,200
Gross pension contribution £21,200
Physical cost of contribution £16,690
Total tax relief (via tax return) £12,720
Net overal cost of contribution £8,480
Effective rate of tax relief 60%

For the present time, pensions remain one of the most attractive investment opportunities for higher earners. In addition to the income tax relief, they offer tax efficient growth and inheritance tax exemptions for significant savings. Although no further details as to the future of pension tax relief are currently available, it is extremely unlikely that any changes which may be made will be to the benefit of higher earners. Those individuals who have not yet made use of their unused carry forward relief should give consideration to doing so whilst this opportunity is still available.

We hope you enjoy reading this article and please do get in touch if we can help in any way.

 

 

Date: 26th November, 2015
Author: Gill Tallon

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