The new tax year has arrived and with it some changes to pensions, so we’d like to take this opportunity to remind you of how useful pensions can be in your financial planning.
Pensions are a tax-efficient way to grow your wealth over the long term because you benefit from some of the tax you would have paid to the government being added to your pension pot when you pay in.
If you have a workplace pension, you should benefit from employer contributions - but there’s no reason not to start additional funding via a private pension too.
You can also use pension contributions as a way to reduce your taxable income so you pay less tax overall while building your future nest egg.
If you have any questions about pensions, speak to your atomos financial planner.
The annual allowance
You can pay in 100% of your earnings - up to a maximum of £60,000 - into a pension each year, this is called your annual allowance.
For high earners, the annual allowance is tapered by £1 for every £2 that your adjusted income exceeds £260,000, down to a maximum contribution allowance of £10,000 a year. This is also the allowance for those that have already accessed their pension but want to make further contributions.
You have the opportunity to maximise pension contributions by ‘carrying forward’ any unused annual allowance from the last three tax years.
This could be useful if you have been paid a bonus or increased your earnings in recent years.
The lifetime allowance
The lifetime allowance was the total amount you can build up in all your pension savings without incurring a punitive tax charge.
From 6 April, the lifetime allowance was scrapped and replaced with two new allowances. These are:
- the lump sum allowance (LSA).
This caps the amount of tax-free cash you can take from your pension at 25% of your total pot, up to a maximum of £268,275. There are limited exceptions to this rule, speak to your financial planner to find out more.
- the lump sum and death benefit allowance (LSDBA).
This caps the tax-free lump sums paid during your lifetime and on death before age 75. It has been set at £1,073,100 for those without prior lifetime allowance protection.
The lump sum allowance
From now on, tax-free cash is limited to the lump sum allowance of LSA £268,275, but there may be an opportunity to make good on tax-free cash not taken in the past.
Under the new rules, if you can show how much tax-free cash you’ve received previously, you may be able to get this deducted from your available LSA.
For some people this will mean being able to access more tax-free cash than was available before, but there is only a brief window of opportunity to do so.
If you have tax-free cash protection in place, you may now get a higher lump sum amount as the calculation used to work out your entitlement will change.
Your financial planner will let you know if you can take advantage of these new rules.
Pension lump sums and death benefit allowance
There are allowances you can use to reduce the tax due on lump sums paid from your pensions if you become seriously ill, or if you die before the age of 75.
Being in a pension scheme where payments of death benefits are flexible could be a good idea. If you are already in such a scheme, it’s important to make sure you have nominated who you want to receive the death benefits from your pensions.
You can do this by completing a nomination (also known as an ‘expression of wish’) which guides pension scheme trustees when deciding to whom death benefits should be paid.
If you are not in a pension scheme where payment of income and death benefits are a flexible option, now could be the time to consider consolidating to a more flexible scheme. Speak to your atomos financial planner for advice.
Taking pension benefits now
If you’re planning to take pension income, lump sums, or transfer your pension to another provider, you may want to delay as there are some regulatory changes incoming. HMRC has advised that more clarity on rule changes is expected soon which may affect your plans.
The good news is that this doesn’t affect people who are already receiving regular pension income.
Your atomos financial planner can advise on the best course of action. If you already have a transfer or withdrawal underway with atomos, your financial planner will review the situation and be in touch.
We’ll bring you more information as we have it.
If you have any questions about pensions or anything else, we’re here for you.
Talk to us.
The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.