10 good reasons to pay into a pension before April
15th March 2015
TLC loves… giving you great advice. That’s why we’re going to team up with a select number of experts to bring you their top tips. This month we’re looking at pensions as there are big changes afoot in April. Here are some wise words from Chartered Financial Planner Lynda Worsley to help you make the most of the time before the changes…
There is less than a month to go before the new pension freedom becomes reality. With the legislation now in place, the run up to April is time to start planning in earnest to ensure you make the most of your pension savings.
1. Immediate access to savings for the over 55s
The new flexibility from April 2015 will mean that clients over 55 will have the same access to their pension savings as they do to any other investments. And with the combination of tax relief and tax free cash, pensions will outperform ISAs on a like for like basis for the vast majority of savers. So clients at or over this age should consider maximising their pension contributions ahead of saving through other investments.
2. Boost SIPP funds now before accessing the new flexibility
Anyone looking to take advantage of the new income flexibility may want to consider boosting their fund before April. Anyone accessing the new flexibility from the 6 April will find their annual allowance slashed to £10,000.
But remember that the reduced £10,000 annual allowance only applies for those who have accessed the new flexibility.
3. Providing for loved ones
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members – there’s typically no Inheritance Tax (IHT) payable and the possibility of passing on funds to any family members free of tax for deaths before age 75.
You may want to consider moving savings which would otherwise be subject to IHT into your pension to shelter funds from IHT and benefit from tax free investment returns. And provided you’re not in serious ill-health at the time, any savings will be immediately outside the estate, with no need to wait 7 years to be free of IHT.
4. Get personal tax relief at top rates
If you are a higher or additional rate tax payer this year, but are uncertain of your income levels next year, a pension contribution now will secure tax relief at your higher marginal rate of tax, so 40%, 45% or more if you have lost your personal allowance.
Typically, this may affect employees whose remuneration fluctuates with profit related bonuses, or self-employed individuals who have perhaps had a good year this year, but aren’t confident of repeating it in the next. Flexing the carry forward and PIP rules gives scope for some to pay up to £230,000 tax efficiently in 2014/15.
For example, an additional rate taxpayer this year, who feared their income may dip to below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill if they had scope to pay £100,000 now.
5. Pay employer contributions before corporation tax relief drops further
Corporation tax rates are set to fall to 20% in 2015. Companies may want to consider bringing forward pension funding plans to benefit from tax relief at the higher rate. Payments should be made before the end of the current business year, while rates are at their highest.
For the current financial year, the main rate is 21%. This drops to 20% for the financial year starting 1st April 2015.
6. Don’t miss out on £50,000 allowances from 2011/12 & 2012/13
Carry forward for 2011/12 & 2012/13 will still be based on a £50,000 allowance. But as each year passes, the £40,000 allowance dilutes what can be paid. Up to £190,000 can be paid to pensions for this tax year without triggering an annual allowance tax charge. By 2017/18, this will drop to £160,000 – if the allowance stays at £40,000. And don’t ignore the risk of further cuts.
7. Use next year’s allowance now
You might be willing and able to pay more than your 2014/15 allowance in the current tax year – even after using up all your unused allowance from the three carry forward years (if you are, lucky you!). To achieve this, you can maximise payments against your 2014/15 annual allowance, close your 14/15 PIP early, and pay an extra £40,000 in this tax year (in respect of the 2015/16 PIP).
This might be good advice if you have a particularly high income for 2014/15 and want to make the biggest contribution you can with 45% tax relief. Or perhaps the payment could come from a company who has had a particularly good year and wants to reward directors and senior employees, reducing their corporation tax bill.
8. Recover personal allowances
Pension contributions reduce an individual’s taxable income. So they’re a great way to reinstate the personal allowance.
For a higher rate taxpayer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%. For higher incomes, or larger contributions, the effective rate will fall somewhere between 40% and 60%.
9. Avoid the child benefit tax charge
An individual’s pension contributions can ensure that the value of child benefit is saved for the family, rather than being lost to the child benefit tax charge. And it might be as simple as redirecting existing pension saving from the lower earning partner to the other.
The child benefit, worth £2,475 to a family with three kids, is cancelled out by the tax charge if the taxable income of the highest earner exceeds £60,000. There’s no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved can lead to effective rates of tax relief as high as 64% for a family with three children.
10. Sacrifice bonus for employer pension contribution
March and April is typically the time of year when many companies pay annual bonuses. Sacrificing a bonus for an employer pension contribution before the tax year end can bring several positive outcomes.
The employer and employee NI savings made could be used to boost pension funding, giving more in the pension pot for every £1 lost from take-home pay. And the client’s taxable income is reduced, potentially recovering personal allowance or avoiding the child benefit tax charge.
Lynda Worsley is a Chartered Financial Planner at Worsley Wealth Management, a trading style of PWH Financial Planning. See more about them at their website