FINANCE
KNOW YOUR
LIMITS !
Planning for retirement ? Read on to find out how to make the most of the available tax relief ...
Andrew Haley of Active Chartered Financial Planners can bring clarity to your pension situation .
Active Chartered Financial Planners ’ Andrew Haley on the latest pension changes
We are all no doubt hoping for a comfortable retirement and the government is naturally in favour of us building our own pension provision , reducing reliance on state support . However , much like a good night out , it is best to know your limits .
“ Pension simplification ” took effect on April 6 2006 and brought in a new tax regime for all pension schemes . There is plenty of debate as to how successful the government was in “ simplifying ” pension legislation , but regardless , we have all been subject to these rules since .
Limits to building your pension The main incentive designed to encourage us to pay into our pensions is the tax relief . How the tax relief applies to you personally will depend upon several factors but , generally speaking , if we personally contribute £ 80 to a pension , this will be topped up with £ 20 by HMRC .
You may then be eligible for further tax relief if you are a higher or additional rate taxpayer . Technically , there is no limit to these contributions , but tax relief on personal contributions is restricted to the higher ( rate taxpayer ) of £ 3,600 or 100 per cent of “ relevant UK earnings ”.
Employers can also contribute to an employee ’ s pension . Employer
contributions can be claimed as a business expense and although there are not the same tax relief limits as with personal contributions , there is a “ wholly and exclusively ” limit to consider .
We also need to be aware of the annual allowance ; the rules operate separately from the tax relief rules , but it is important to consider both when building your pension .
The annual allowance began at £ 215,000 in 2006 / 07 , reaching £ 255,000 at its highest in 2010 / 11 , but has remained at £ 40,000 since April 6 2016 . The type of pension scheme you are a member of will influence the “ pension input amount ” for annual allowance purposes .
There is also the potential to carry forward some of your previous unused allowance , potential tapering for high earners , and a lower “ money purchase annual allowance ” for those who have flexibly accessed pension benefits .
Some employees , particularly those in active defined benefit schemes , might have been caught off guard by annual allowance breaches . It is our responsibility as individuals to selfassess any annual allowance charge .
The overall “ limit ” There is technically no limit to the overall amount you can receive – or “ crystallise ” – from a pension . There is , however , a significant tax allowance , known as the lifetime allowance ( LTA ), which once breached , results in tax charges .
Much like the annual allowance , the LTA has seen notable reductions from its high point . The LTA was introduced at £ 1.5m in 2006 , reached a high of £ 1.8m in 2010 , but now sits at £ 1,073,100 . In addition to this , the ( LTA ) limit has been frozen and is not due to rise until April 2026 .
What was once a tax paid by very few has now become far more common , with 8,510 LTA charges reported in 2019 / 20 totalling £ 342m ( a 21 per cent increase on 2018 / 2019 )*.
Again , there are plenty of technicalities to keep LTA planning interesting , with different ways of valuing defined contribution and defined benefit pensions , options as to how you receive benefits , impacting the tax you pay and , sadly , the limit can ’ t even be escaped on death .
There are ways to make planning for and dealing with these limits less painful . Working with a financial planner can help bring much-needed clarity . If this is something you would like to explore , Active Chartered Financial Planners are here to help .
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Source : gov . uk The information provided must not be considered as financial advice . We always recommend that you seek financial advice before making any financial decisions
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