I have noticed an increase in the numbers of clients who are seeking advice about pension contributions and the tax relief they provide. Of course, not being an IFA, I can’t advise on the pension planning side of their questions. I leave that to my appropriately qualified colleagues.
Being a tax advisor I can advise on the nuts and bolts of the tax relief. I can also make forecasts about how I believe that tax relief may change in the future.
In July the Chancellor issued a consultation document on revisions to the tax relief. The smart money is on change from April 2016 and some commentators are suggesting that the 25 November autumn statement may announce what the future holds.
I, like many of my colleagues in the profession, expect that the change will be no more than a £1 reduction in contribution limits for every £2 of income above £150,000 with everyone being able to make at least £10,000 of contributions. I suspect that the tax relief will remain at the individual’s marginal rate and therefore a 45% taxpayer will receive 45% tax relief on contributions above £150,000. When calculating the restriction the contribution made will be added to income and therefore, in reality, this will hit individuals with incomes of less than £150,000. Others believe that there will be a flat rate of tax relief on all contributions at 20% or 33%. A further suggestion has been the reversal of the tax profile so that contributions are made out of taxed income but extraction out of the pension pot is tax free, i.e. a sort of savings plan.
What is certain is that the consultation has led to higher earners considering their pension position in more detail with a view to maximise contributions before 5 April 2016.
There is the ability to carry forward unused pension relief capacity from the previous three years. 2015/16 has a further boost to the permitted pension contribution levels arising from the Pension Input Period (PIP) changes. In simple terms the PIP is the pension’s year end. Various pension schemes have different year ends. The impact of the year end was not well understood and, for those who understood it, led to both opportunities and difficulties. HMRC have, quite rightly, decided to do away with this complexity and are aligning the year end of all pensions with the tax year end. In order to ensure that no-one could be disadvantaged by this move there is the ability to claim up to two years pension tax relief in 2015/16. This is relevant for individuals who made contributions before 9 July 2015 and potentially adds an extra £40,000 of contribution capacity before 5 April 2016.
In theory, the interaction of carry forward rules and changes to PIPs mean that an individual could make contributions in excess of £200,000 in 2015/16 and get almost £100,000 of tax relief. If pension changes are to restrict the capacity for future contributions then it may not be such a bad thing to build up a pot whilst there is the possibility to do so.
Interest rates are low and some individuals are considering taking out loans to finance the enhanced contribution they will be making in 2015/16. Loans would be paid back by the surplus cash which the individual has in future years when they are restricted on their ability to finance future pension contributions.
There are a myriad of possibilities and each should be tailored for the individual, their risk profile and needs. Professional advice, both tax and financial, should be sought before binding commitments are made.