How to get the most out of your pension before the tax year ends
Protect your Lifetime Allowance
The Lifetime Allowance – the maximum amount of pension savings you can build up without a tax charge – was cut from £1.25m to £1m in April 2016 but you may be able to shelter your retirement savings from the taxman if you go above this threshold.
The most urgent call to action is Individual Protection 2014 (IP 2014). If you had over £1.25m in your pension pot at 5 April 2014, when the Lifetime Allowance threshold was higher, it protects your money up to the value of £1.5m. The deadline to apply for the protection is 5 April 2017 and you can do it online at HMRC. You will need to ask your pension provider to see how much your pensions were worth at that point and to check that you’re eligible.
There are two other ways to protect your money from the tax man (Fixed Protection 2016 and Individual Protection 2016), depending on the amount and the date at which the sum was accrued but unlike IP 2014, these are not time sensitive.
Carry forward up to £170,000
For many people, the annual pension allowance – the amount you can save in your pension tax-free every year – is £40,000.
But special ‘carry forward’ rules mean you may be able to contribute more – in fact, four times as much.
‘Carry forward’ rules allow you to use up any unused annual allowance going back three years so within this tax year (until 5 April 2017), you could contribute as much as £170,000 into your pension tax-free, including both personal and employer contributions.
In order to take advantage of the rules, you must have been a member of a pension scheme during the tax year from which you intend to bring forward the allowance. The annual allowances were as follows:
- 2013/14 – £50,000
- 2014/15 – £40,000
- 2015/16 – £40,000
- 2016/17 – £40,000
On a practical level, you need to deduct from the maximum allowance any contributions actually made in each tax year by you and/or your employer.
Martin Tilley, director of technical services at Dentons Pensions, says it would be wise to check with your current pension provider for confirmation of contributions that were made.
The Annual Allowance Taper took effect from 6 April 2016 which reduces the annual pension allowance limit by £1 for every £2 for higher earners. That means the annual allowance gradually falls for people earning above £150k until it bottoms out at £10,000 for those with an adjusted income above £210,000. But for the purpose of the carry forward rules, the Annual Allowance Taper won’t impact on previous years’ allowances.
The carry forward rules also do not apply to the £10,000 Money Purchase Annual Allowance (MPAA) – a restricted annual allowance for those aged 55+ who have released or drawed down some or all of their tax-free cash sum and who have benefitted from an income from the remaining drawdown pot.
Set up a pension scheme with a small amount
If you’re unable to save a lot of money in this tax year but want to contribute towards your retirement, Tilley suggests setting up a pension scheme now (before the end of the tax year), even with a small amount such as £100.
As the tax protections and carry forward rules stipulate you must have been a member of a pension scheme on a particular date. Even with a modest amount you’re essentially opening up a pension scheme to enable you to shelter and grow your contributions in future years, perhaps even above future allowance cuts.
Tilley says: “A contribution of £100 this year means that in the next tax year you could have a £40,000 allowance for that year plus a carry forward allowance from 2016/17 of £39,900. There are numerous direct to consumer pension providers but if you are at all unsure you should consult an independent financial adviser.
“This is particularly useful for the self-employed but a lot of senior employees/directors still do not have any form of pension provision and have even opted out of auto-enrolment schemes. Membership of such a scheme would qualify as registered scheme and open up the carry forward provisions for later years.”