Tax can be complicated, pensions more so. When you have to consider both and constantly changing rules it can be a severe challenge. It is vital though that anyone with pension savings considers before 6th April 2012 whether they need to take specific action.
What is changing ?
There are two main changes taking place on 6th April 2012 that may affect you:
- Relief (or capacity) brought forward from the tax year 2008/09 will expire;
- The Lifetime Allowance (LTA) will reduce from £1.8m to £1.5m.
A third move is apparently being considered by the government, being the abolition of higher-rate tax relief. Whether that happens and if so when, is uncertain, but the Budget on 21 March 2012 may be significant.
Can anything be done ?
Looking first at unused relief, or capacity to make pension contributions, it is important to understand what can often be a muddled position. There are special rules in place for the tax years 2008/09, 2009/10 and 2010/11, based on an assumed Annual Allowance of £50,000 per year. Contributions below £50,000 in any of those years will therefore trigger unused relief, which can be carried forward for three years, at which point it expires. The carry forward rules have some quirks and need to be considered carefully.
When evaluating whether there is any unused relief, it is not as simple as looking at pension contributions paid in the respective tax years. The concept of a Pensions Input Period (PIP) is a fundamental part of the system. It is necessary to consider contributions made in a PIP and then look at the tax year in which the PIP ends. The concept and importance of a PIP is often overlooked with disastrous consequences. On a more positive note, it is possible to change a PIP in certain circumstances. This can be useful and at best provide a doubling-up of pension capacity.
Perhaps the most important deadline looming is that relating to the change in the LTA. A reduction from £1.8m to £1.5m is unwelcome but has been well trailed. With swift action though, individuals are able to lock into the higher LTA of £1.8m. To do so they need to complete a form, register this with HMRC and abide by certain restrictions, the most important of which is not to make pension contributions or accrue further benefits. You do not need to have pensions savings of £1.5m to seek this protection and many will wish to do so even if their current fund size is well below the current limits.
There will be many individuals with a combination of the issues above. Maximising contributions now will be sensible to either use up relief that will expire or to secure tax relief at 40% or 50% (while it is available). Whether the PIP issue is a problem or opportunity will need to be determined. All of this will be even more crucial if this is the last chance to make contributions ahead of seeking LTA protection.
Please contact us urgently if you feel you may be affected by any of these changes.