Regular Pension Tax Review – What’s the point?

Do you have a date in mind when you would like to retire?

Do you want to have a financially comfortable retirement?

Is a pension one of the important components for you to achieve that goal?

What level of income do you think you will need once you pack in work?

Are you on course for hitting that pension pot target?

Are you aware of the pension tax breaks which could help you on the road?

Could any of the potential pension tax pitfalls scupper your well laid plans?

These questions should be reviewed on an annual basis so that steps can be taken, or avoided in certain cases, to enable you to reach the promised retirement land in the best financial shape possible to enjoy it.

This can be done by yourself or in conjunction with a qualified IFA and a tax practitioner. The IFA can advise on the best pension scheme and guide you as regards the appropriate investment risk which is right for you. The tax practitioner can look at the most tax efficient way to build up your pension and flag up the tax risks if certain injudicious steps are taken.

What sorts of things should you look out for on an annual basis from a tax perspective?

► Is the total value of your pension schemes approaching or over the lifetime allowance limit of £1,073,100? If it is, you may not want to make any further pension contributions. Upon activating that pension, any capital withdrawal in excess of the lifetime limit will attract a 55% punitive tax charge and any income taken out, above that threshold, would also be hit with an additional tax liability of 25%, above and beyond what you are normally taxed at.

► The maximum annual pension allowance you have available is £40,000. If you have been a member of a UK registered pension scheme in the previous three tax years you could bring forward unused pension allowance from those years and utilise in the current tax year. Potentially, if it was a dormant pension scheme during those year, you could make a maximum pension contribution in the present tax year of up to £160,000. However, be careful, the maximum an individual can pay into a pension scheme would be the equivalent of their earnings in that year.

► However, an employer can make a pension contribution, subject to the pension allowance limit, in excess of an employee’s earnings.

► If you have already flexibly accessed a money purchase pension scheme, going forward, it will restrict your annual pension allowance for that type of scheme to only £4,000.

► Be careful, if your ‘adjusted’ income has, or is about to exceed £240,000, you might find yourself hit with a pension tax charge at your highest rate of tax. For every £2 over that limit, you lose £1 of your pension allowance for that year down to a minimum threshold of £4,000.

► If your total income is between £100,000 and £125,140 you start to lose your tax-free personal allowances (£1 for every £2 over £100K). You might therefore want to personally pay the pension contribution, rather than the employer, as that could effectively save you 60% (61% in Scotland) tax.

► The same approach could be adopted if your total income is in excess of £50,000 and you are caught by the high-income child benefit charge.

► If you are thinking of leaving the UK and are a member of a UK registered pension scheme, then you might want to consider maximising your pension contributions prior to doing so. Otherwise, you would be restricted for the next 5 years to only being able to contribute £2,880 on annual basis. The Government would top it up each year to £3,600.

► You could consider paying into a pension scheme for your children or grandkids up to £2,880 per year (with tax relief £3,600). This could also immediately help your inheritance tax position and provide a nice pension nest egg for the children.

Tip – These are just some of things which should be reviewed on an annual basis to make sure that you hit the goal you want to achieve with the minimum of fuss and in the most tax effective way. If you would like a pension tax review, either on its own, or as part of an overall year-end tax planning exercise, please do not hesitate to contact us.