Rules on pensions are not always black and white
in the eyes of savers, but they are proving to be a handy revenue-raiser for government.
Tighter rules that limit the amount of tax relief available on pension savings are proving to be a money- spinner for the Treasury. According to data released by HMRC, around 2,400 savers breached the pension annual allowance in 2016/17, paying £53 million in tax (www. citywire.co.uk, 3 August 2017).
The annual allowance restricts the amount that you can put into your pension tax-free each year. It is currently set at £40,000 for many higher rate taxpayers, but a new rule introduced in 2016 means that the annual allowance reduces by £1 for every £2 earned over £150,000, dropping to a hard floor of £10,000 for those earning more than £210,000 a year.
Savers will usually pay tax at their highest marginal rate
on any savings above the annual allowance, which is collected in two ways: either direct through the ‘scheme pays’ approach, or through self-assessment. As the name suggests, ‘scheme pays’ is when the pension scheme pays the whole or part of the tax to HMRC on your behalf. In other cases, you must pay the tax charge to HMRC directly.
The £53 million collected so far only includes money received through the scheme pays arrangement. Because self-assessment returns for the 2016/17 tax year will not be received by HMRC until January 2018, the final tax- take is likely to be higher.
Yet the annual allowance is not the only way that the government curbs pension saving. It imposes an additional control called the ‘lifetime allowance’ (LTA) and it too is an earner for the government.
In 2015/16 the Treasury took almost £36 million from people who breached the LTA. This is up from £20 million in 2014/15 (Treasury data, accessed 7 August 2017).
The LTA represents an overall ceiling on the amount you can build up in a pension, including the value of any defined benefit (final salary) schemes you belong to. Anything over the LTA is taxed at up to 55% when you take the excess as a lump sum, and at 25% on top of your marginal rate of tax when you take it as income.
In 2011/12 the LTA was set at £1.8 million, but successive cuts have trapped many savers; the reduction in the LTA from £1.25 million to £1 million in April last year has left thousands more individuals potentially within its grasp.
With the reduction in the lifetime allowance to £1 million, more people will have to look at other options they have to fund their retirement.
The key to all of this is to take advice to help understand exactly what income is needed in retirement, and then decide on the most appropriate investment strategy going forward.
To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, contact Vaughn Thomas of Sovereign Wealth LLP on 0113 414 3590 or email Vaughn.firstname.lastname@example.org