Could you benefit from a contribution to your pensions now?

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

Political parties of both persuasions are threatening further attacks to on pensions in their Manifestos. This may mean taking action to increase your pension contributions, where affordable, could be advisable to head off any negative impact introduced after the general election on 7th May.

The Labour party have threatened to reduce the lifetime allowance from £1 million to £750,000. The lifetime allowance is, for most people, the limit to the tax efficient pot that can be built up within a pension fund, and any excess above the lifetime allowance potentially may pay recovery charges at the rate of 55%.

A 20x multiple is applied to the Final Salary annual pension figure and for most “Money Purchase” pots the value is simply the value of the fund at the time of “crystallisation” (broadly speaking; payment, death or age 75). The Conservatives have already reduced the lifetime allowance from £1.25 million to £1 million and have frozen it for two years. It’s our anticipation that future increases will be less generous than the rate of inflation. The inheritance tax threshold, which has been virtually unchanged for a decade probably provides a good indication of potential policy in this area.

The annual allowance is the maximum permitted allowable contribution to your pension in any given year, and currently stands at £40,000. The Labour party have suggested they will reduce it to £30,000, whilst also reducing the income tax relief to a flat 20% for those earning over £150,000, largely reducing the point of making pension savings at this level!

The Conservative Party have suggested a progressive reduction to the annual allowance to as little as £10,000 for those earning over £150,000. This staggered approach seems hideously complicated and again provides such a trivial allowance as to be almost worthless to those who have such earnings.

Whilst it seems likely that these are the only two parties that can form a Government, it may well be that concessions to form any coalition, could significantly alter the proposals for better or for worse. However fully funding pensions can be very tax effective and if you are interested in making provision for your future financial independence, then pensions can be a very effective tool. Given the risk of a reduction in pensions relief you may find this an encouragement to make arrangements before changes are made.

Clearly, in practice it will not be possible to make changes before the General Election. It is our anticipation that any Government will have an emergency budget, as has happened in previous election years, probably around June. Therefore if you have any questions regarding pension tax relief and how potential changes made in an emergency budget, or indeed the Budget 2015, may affect your personal circumstances, please do not hesitate to contact us on the number above.

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