Two years of pension changes: seven essential checks to make now
In the worst cases you could find yourself breaching rules if changes aren’t paid attention to, or else fail to make the most of the rules as they stand.
This risk has only increased over the past two years as new rules have dramatically changed the options for those hitting retirement, while external events like the vote to leave the EU have changed asset prices in a way that could make a difference to retirement choices.
It means now is a good time to take stock of your pension plans – here’s a checklist to get you started.
1) If your pension pot could reach £1m
The Lifetime Allowance – the maximum amount of pension savings you can build up without a tax charge – was reduced from £1.25m to £1m back in April 2016. Anything over that could attract a tax charge as high as 55%.
If your pension’s close to the limit, or on track to hit it, you’ll need to make a plan. Bear in mind that all contributions and investment growth counts against the £1m limit, while any annual income from Defined Benefit pensions is multiplied by 20 to give a figure that can be tested against the Lifetime Allowance.
Those who already had pension rights of more than £1m on 6 April 2016 when the change was made can still apply to protect any rights up to the value of £1.25m from the tax charge.
2) If you earn more than £110,000
April 2016 also saw the introduction of a ‘taper’ on the £40,000 Annual Allowance for pensions – the amount that can be contributed in any financial year – for those earning high amounts.
It doesn’t affect everyone earning £110,000 and above, but this is the point at which it could potentially come into play.
The taper works like this. Anyone whose annual ‘threshold’ income is more than £110,000 (this includes income from all sources minus pension contributions) and ‘adjusted’ income is more than £150,000 (all your taxable income plus any pension contributions made to a workplace pension by you and your employer), comes within scope of the taper.
For every £2 your adjusted income exceeds £150,000, your annual allowance reduces by £1. The maximum reduction to the annual allowance is £30,000, which means it reduces to £10,000 when your adjusted income hits £210,000.
3) If you plan to access your pension flexibly and keep working
Following pension freedoms introduced in 2015, anyone can access their pension savings from age 55. If this involves accessing savings flexibly – by taking money beyond the 25% tax-free cash that is allowed – then a lower Annual Allowance is applied. This is known as the Money Purchase Annual Allowance, or MPAA.
In the 2017 Budget the government proposed reducing the MPAA from £10,000 to just £4,000. This would dramatically reduce the scope for further pension saving after accessing a pension.
The proposal has been disrupted by the election – it was pulled from a slimmed-down finance bill prior to the disillusion of parliament – but many expect it to be reintroduced in the event of a Conservative victory.
Ensure you’re aware of the MPAA if you’re planning to access your pension early.
4) If you have a Defined Benefit pension
Typically more generous than alternative schemes and now in short supply anywhere, it has seldom made sense to transfer a Defined Benefit scheme to a Defined Contribution scheme.
More people have been questioning that, however, because the transfer values being offered to transfer have risen in recent years – and some have proven too good to refuse.
The reason? Low returns on government bonds have made DB pension liabilities more expensive to meet and schemes have been willing to pay more to get members to transfer away. The latest phase of the trend came after the vote for Brexit in June 2016, which forced another interest rate cut and pushed government bond returns even lower.
Check to see the transfer value offered on your DB pension – but be prepared to follow the financial advice that this step requires.
5) If you want to wait in order to get a larger state pension
For those who can afford to do it, there has always been a compelling case for delaying when you take the state pension. That’s because the government is willing to increase what you get the longer you delay.
The rate of that increase, however, has fallen. Prior to April 2016, delaying your state pension by a year would increase the income you eventually got by 10.4%. With that rate, the point at which the extra income made up for foregoing a year of state pension came after about 10 years.
With the new lower rate and the higher new state pension now in place, this time extends to 17 years. You’ll need to live at least this long to get any benefit from delaying, so factor this into your plans.
6) If you need to maximise the state pension
This is likely to include most people, because the state pension represents valuable guaranteed income in retirement, uprated with inflation, which is increasingly expensive to secure by other means.
The introduction in April 2016 of a new state pension – currently set at a maximum of £159.55 a week – required a complicated set of transitional arrangements so that state pension rights accrued under the old system were recognised.
Working out what you’re on track to get is complicated for individuals, but there is an electronic service to help you do it. If needs be, consider making up any shortfall in National Insurance contributions so that you maximise your state pension.
7) If you were locked in by hefty exit charges
Consolidating pension savings in one place can have advantages. It lets you potentially lower the costs of investing your money, as well as provide a more convenient place to view and manage your savings.
For some, however, this has been impossible thanks to punishing exit charges on some workplace pensions.
However, March 2017 saw a 1% cap on contract pension exit charges and applies to all those aged 55+ who are eligible to access the freedoms. Check your old pension pots to see if they could now benefit from being moved to a new home.
Ed Monk is associate director for personal investing at Fidelity International