The pension rule confusing savers and their advisers
Dentons, which looks after £3bn of client assets, says it receives at least one call a day from direct clients or financial advisers looking for clarification about the new tapered annual allowance rule.
From 6 April 2016, anyone with ‘adjusted income’ above £150,000 will have their annual pension allowance – that’s the amount they can save into the pension each year and receive tax relief – restricted. For every £2 they have above £150,000, their annual allowance is cut by £1. The annual allowance bottoms out at a modest £10,000 for anyone with income above £210,000.
‘Adjusted income’ is any taxable income including earnings, property rentals, interest, employer pension contributions and contributions made via salary sacrifice.
The main issue with the new rule is people do not know what their ‘adjusted income’ is until the end of the year, making it hard for them to know how much of an annual allowance they have to play with.
“If you overpay into your pension, in any given tax year, above your permitted annual allowance, there’s a tax charge – you’ll pay income tax on the excess above your annual allowance,” said Martin Tilley, director of technical services at Dentons.
If you’re a higher earner and you’re worried about an unnecessary tax bill, here are some top tips from Tilley:
- Estimate as best you can, your total expected income for the current tax year. You will need to include earnings, dividends, rental income and interest. Keep a track of this as the year progresses and note any unexpected income received.
- Underpay is better than overpay because of carry forward. These are special rules which allow you to contribute more into your pension by using up any unused annual allowance going back three years. Potentially you could put away up to £170,000 and the new annual tapered allowance won’t impact on previous years’ allowances.
- Make a note of contributions paid into all pension schemes from the last three years in case any excess can be used as a carry forward contribution using previous years’ allowances.
- Make regular pension contributions of a modest amount but delay any top-up contribution until nearer the end of the tax year when you may have a better idea of your total adjusted annual income and therefore your annual allowance.
- If in doubt, seek guidance from an Independent Financial Adviser or from your accountant.