It seems that this tax year, like so many others, has seen significant changes announced in relation to the ability of clients to build up private pension savings to deliver part of their future retirement income. The Chancellor’s Autumn Statement signalled a reduction in the Annual and Lifetime Allowances but only applying from the start of the 2014/15 tax year. This will create, for some clients, a shorter term focus of how they can maximise their private pension savings before change takes effect.
Some key areas for focus as this tax year end approaches are:
Carry Forward of Unused Annual Allowances
Clients with an unused Annual Allowance from pension input periods ending in the 2009/10 tax year will lose that entitlement at the end of this tax year. Funding of the current year’s Annual Allowance of £50,000 is a pre-requisite to use this opportunity as is the need to ensure the contributions are applied to a pension input period that will end in this tax year.
Additional Rate Tax relief
For clients currently liable to additional rate income tax at 50%, the use of pension contributions to reduce that liability to at least the higher rate threshold is something that must be considered. The Chancellor has previously signalled that additional rate tax would reduce to 45% next tax year so extra funding now will increase the tax efficiency of the pension savings made by 5% compared to contributions made next tax year.
Clients with adjusted net income of over £100,000
Funding pension contributions personally, or through the use of salary sacrifice, to help reduce an individual’s income below £100,000 will enable those individuals to regain their personal allowance which would otherwise be fully lost if income exceeds £116,210. The effective rate of tax relief on the income band between £100,000 and £116,210 is 60% !!!!
Regaining Child Benefit
Clients eligible for Child Benefit will see that benefit reduce or be wiped out if their adjusted net income exceeds £50,000. Funding pension contributions to reduce the income below that threshold will regain the Child Benefit for this tax year and afford ongoing planning opportunities when a full year of the Child Benefit changes takes effect from the start of the 2013/14 tax year. See my earlier blog on the subject for more details.
“Recycling” unused income withdrawals
Clients under 75 who wish to improve the overall structure of their existing retirement savings at no effective cost can do so by creating uncrystallised funds from an existing drawdown fund. This takes more prominence for clients who started in capped drawdown on or after 6 April 2006 as this will enable additional designations to take place at suitable times to boost existing drawdown income. This is most beneficial to clients with pension income years starting on or just after 26 March 2013 due to the recently announced 20% uplift to the base income calculation. For those with no ongoing relevant earnings the annual recycle contribution threshold is £3,600. You should take advice in this area as direct recycling is against pension regulations, and you must be able to demonstrate suitable other income, so this may not be available to everybody.
Clients considering applying for Flexible Drawdown in 2013/14 tax year
For clients in this segment the current tax year represents the last chance to make contributions to registered pension schemes before applying for Flexible Drawdown. Discussions may need to take place if they are active members of a defined benefit scheme as to when they will need to opt-out of that scheme to cease accruing benefits in order to meet the eligibility requirements for Flexible Drawdown.
Gifting income using ‘normal expenditure rules’ from Capped and Flexible Drawdown arrangements
Using this planning can mitigate, to some degree, the 55% tax charge that would otherwise apply if a lump sum payment was made to beneficiaries on an individual’s death. One use of such gifting could be to boost, or start, pension arrangements for children or grandchildren, ensuring that future growth is in the hands of the beneficiary at the earliest possible time.
The time for action this tax year will be shorter
It will be important where such planning is being considered to know what the requirements are of the drawdown provider in making income payments before the end of the tax year.
Impact of Retail Distribution Review on tax-year end
Unlike other years, being in a post-RDR world now creates other issues to be considered when providing advice on these retirement planning opportunities… Questions you and your adviser may need to consider are:
- How will you wish to pay for this advice and any ongoing service proposition the adviser provides?
- Can it be facilitated from your existing pension arrangement where an additional investment is being made?
- If it can, is there an impact on pre R-Day adviser remuneration you have been receiving that may need to be included in a new agreement to be put in place between yourself and your adviser?
- If it can’t be facilitated in the existing product, is a separate arrangement needed or will you pay any fees direct to the adviser (and will there be any improved terms applied to the existing contract as a result of no commission being paid?)
Your adviser will need to be able to advise you as to what application process is required, especially where additional investments are being made to a contract, to ensure that all relevant paperwork is with the provider in time for tax-year end. This year especially, you will need to ensure that decisions to make any pension contribution are not left until the last minute as it may not then be possible to prepare additional paperwork to enable the provider to accept the contribution in time, resulting in your missing out on tax relief that would otherwise be available.
The Government has announced that Budget Day will be 20 March 2013. For anyone who may be concerned that the Chancellor will deliver currently unknown ‘surprises’ in the Budget that might affect current planning, ensuring contributions are made and accepted by 19 March will give the best chance of ensuring they benefit from current pension rules. The RDR considerations highlighted above will apply equally where Pre-Budget action is being considered.
As always, with tax-year end approaching, activity with appropriate clients will increase the nearer the day approaches. With the Easter break falling at the end of March the last working week before tax year end will be shortened.
The time for action this tax year will be shorter in practice if clients are to benefit from the opportunities that exist to use pension savings as a tax efficient means of boosting future retirement income.Source: Skandia – Adrian Walker – March 2013