Our Focus this month is an important reminder for all those who are members of a pension scheme – whether a personal pension plan or a company defined benefit scheme. Below, we focus on several key areas.
Annual Allowance
Your Annual Allowance is based on your earnings and other income and is currently capped at £40,000 and is the total amount of all contributions to personal pensions (defined contributions) on which you can receive tax relief. It is also the cap on the total benefits you can build up in a defined benefits pension (e.g. final salary) scheme.
Know your PIPs! The Annual Allowance applies to total pension contributions made to your personal pension plans, or to the benefits built up within a defined benefits scheme, over your plan’s/scheme’s Pension Input Period that ends in the current tax year.
Tapered Annual Allowance
There is a tapered reduction in the Annual Allowance for individuals with income (and can include the value of any pension contributions) of over £150,000 a year, where their income (excluding pension contributions) is in excess of £110,000.
The way that the tapering works is that for every £2 of income that exceeds £150,000, £1 of the £40,000 Annual Allowance will be lost. There is a cap to the tapering of £30,000, which means that the minimum tapered Annual Allowance is £10,000.
Money Purchase Annual Allowance (MPAA)
The MPAA is the maximum amount you can pay into your money purchase (also known as defined contribution) pension in a tax year after you have started to take money from your pension pot in certain ways. Currently capped at £4,000.
Annual Allowance Charge
This is the rate of tax you pay for any contributions over your Annual Allowance or MPAA in a tax year, currently set at your highest marginal rate of income tax.
Lifetime Allowance
The Lifetime Allowance is a cap on the amount of pension benefit you can build up over your lifetime. The Lifetime Allowance for 2019/2020 is £1,055,000 (£1,030,000 for 2018/2019).
If the value of all of your pension benefits, across all schemes, exceeds the lifetime allowance, any excess attracts a tax charge of 25% if it is withdrawn as an income (for instance from an annuity or a drawdown arrangement) or 55% if it is withdrawn as a cash lump sum.
We advise you to regularly review your pension planning and, inter alia, to check:
* if you are exceeding the Annual Allowance – otherwise you will not receive tax relief and you will pay an Annual Allowance Charge (see above);
* if you have, or are in danger of, exceeding the Lifetime Allowance – in view of the potential tax charges;
* if you have any unused reliefs from the previous three years – because you may be able to use the Carry Forward provisions to enhance this year’s contributions above the annual cap.
NB The above notes are necessarily brief and only cover some of the main points. The pension rules are complex and, as always, we strongly recommend that you seek advice in time to take any appropriate action.
Remember, we are here to help so please do not hesitate to contact us regarding your financial planning situation – Reviews are part of our added-value services for our clients.
We have set out above what is only a brief summary of some key points that involve quite complex considerations. Allowances, caps, levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. Information and data may change after the date of their original promulgation in our Newsletter or this Focus article. Always seek relevant professional advice before taking, or refraining from taking, any action.
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