THERE have been several radical changes to the pension system in the past year and, during his last budget, the Chancellor George Osborne chose to focus on restricting relief for more affluent investors.
The changes to the annual allowance, designed to encourage people to save for their retirement, will affect high earners in Northampton, especially if they do not properly plan for the arrival of the new rules.
At the moment, the amount individuals can put into their pension pot each year whilst still qualifying for tax relief is £40,000, with a lifetime limit of £1.25 milli
THERE have been several radical changes to the pension system in the past year and, during his last budget, the Chancellor George Osborne chose to focus on restricting relief for more affluent investors.
The changes to the annual allowance, designed to encourage people to save for their retirement, will affect high earners in Northampton, especially if they do not properly plan for the arrival of the new rules.
At the moment, the amount individuals can put into their pension pot each year whilst still qualifying for tax relief is £40,000, with a lifetime limit of £1.25 million. However, from April 2016, investors with income over £150,000 will see their annual allowance steadily reduce. As a result, individuals taking home £210,000 a year or more will see their allowance drop to £10,000.
The lifetime limit is also set to fall to £1 million.
There is a special definition of income (`adjusted income’) used when calculating the reduction, which includes interest earned on savings, dividends from company shares, employer pension contributions and so on. The adjusted income definition will result in many investors being caught by the new annual allowance rules. Furthermore, it prevents investors entering a salary sacrifice or flexible remuneration arrangement to reduce their threshold income. People in this salary threshold will need to calculate how much they earn to determine the extent to which the changes will affect them.
Research suggests that nearly a quarter of a million earners may face unexpected tax charges due to confusion surrounding how and when these changes take place. This makes seeking the correct advice essential.
High earners planning to defer investing into their pensions until later in their careers could see the annual allowance restrictions limit the opportunity to contribute sufficiently to achieve their target retirement income. Where possible, they should consider using their available allowances before their contributory power is reduced.
At Grant Thornton, we deliver integrated professional tax and independent wealth advisory services offering high quality advice and outstanding service to those people who find themselves seeking advice. A growing economy, an uncertain world and a rapidly changing political structure in the UK can all have an impact on how we invest our wealth. When it comes to saving for your pension, it is important not to leave it up to chance.