High earners' pension relief cut

Following the 2015 summer Budget, those earning more than £150,000 will no longer qualify for an annual allowance of £40,000 (the annual allowance is the maximum that can be paid into a pension in a single tax year).  Instead, high earners will see this allowance potentially reduced to £10,000.  From 8 July 2015 those earning over £150,000 will see their annual allowance reduced by £1 for every £2 earned.  On this basis, those earning in excess of £210,000 will have a reduced annual allowance of £10,000.  This is a far cry from 2010/11 when the annual allowance was £255,000.

To compound matters, the change in legislation does not take into account the value of existing pensions.  There will undoubtedly be some individuals who wish to put more into their pension, only to be prohibited by a much lower annual allowance.

So where does this leave high earners looking to plan for their retirement?

Additional rate taxpayers may need to consider other forms of saving towards retirement, making use of other tax breaks such as Individual Savings Accounts (ISA), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT), at the same time ensuring diversified arrangements are in place to suit their needs.

One option that could be considered is making use of ‘carry forward’, which enables individuals to look back at the last three tax years and bring forward any unused allowance in order to make additional pension contributions in the current tax year.  The reduced annual allowance is likely to leave high earners with less ability to carry forward in future years, so it is important that those who are likely to remain high earners use this window of opportunity to their advantage.  Carry forward, like an ISA allowance, works in a similar “use it or lose it” way, so if you wish to maximise your pension contributions, ensure you take action by the end of this tax year in order to take full advantage of this opportunity.

Contact us to discuss personalised solutions for pension funding options.

Pensions are a long term investment and the capital you invest can go down as well as up.  You may get back less than originally invested.  Pensions tax legislation can and may change in the future.