Important changes to Pension Legislation
8th July 2021
At P W White & Partners we continue to highlight the benefits of a Personal Pension (including the Drawdown element). It benefits from some very favourable legislation, which make it one of the most flexible, tax efficient investment wrappers available.
However, there have also been some recent changes that you may not be aware of so we wanted to highlight some issues that may affect you. These changes also emphasise how important it is that you provide us with information concerning ALL your financial plans. Any decision that you make concerning one plan could have direct consequences on another, so please do ensure that we are aware of everything you have.
Let’s start with the very latest change, announced in the Spring Budget.
Frozen Lifetime Allowance
The Pension Lifetime Allowance (LTA) is the amount of money that can be drawn from a pension before a tax charge is made. This charge can be as high as 55%. LTA had been provided with some form of protection against inflation and it now stands at £1,073,100. However, it has now been frozen at this level until tax year 2025/26. If any growth or contributions paid into a pension increase the value of your pension investment, it could potentially make the Lifetime Allowance an issue. If you think you may be affected by this, do speak to us urgently as the LTA charge can be a punitive one.
Retirement age changes
Some time back, the Government announced that in 2028 it would increase the minimum age that you could draw benefits from your pension from 55 to 57. Whilst this is now becoming more relevant to people as they are planning their retirement, it is not yet clear how the Government is going to implement the changes.
It may be that the change will happen on a fixed date such as 6 April 2028, or it may be phased in, similar to the gradual increase in state pension age. It is also unclear as to what happens to someone who reaches age 55 before the cut-off date. Would they keep the right to access their pension earlier than age 57?
If you may be affected by this, it is important to discuss your options accordingly.
Income Tax issues when initially drawing your Pension
The first time somebody draws income from their pension, the scheme administrator is required to deduct tax using the emergency code (1257L) on a Month 1 (M1) basis. In many instances, this will cause excess income tax to be deducted, meaning that less net income is received. Incorrect amounts of income tax deducted when a pension is first accessed can be frustrating, especially where a payment is needed for a specific purpose and the net amount paid does not cover what was required.
This is an issue that the financial industry has discussed at length with HMRC, and various solutions have been proposed. However, at the moment, scheme members will need to rely on making a manual tax reclaim if they want to recover the overpaid tax relatively quickly.
We will discuss this matter fully when looking to take income from your Pension for the first time. However, it is useful to have an awareness of how the PAYE system works and how to recover overpaid tax, especially when looking to access a pension for the first time.
Annual Allowance is the amount of money that an individual can pay or receive into their pension. The figure at present is £40,000 and anything in excess of that may have a subsequent tax charge levied against it. However, there are two further instances when a potentially lower Annual Allowance is used and it is important that you are aware of these.
i) Tapered Annual Allowance
This was introduced in 2016 but amended last year. It was put in place to restrict the level of contributions that could be paid into a Pension by very high earners. Therefore, if you receive income in excess of £240,000, you may have restrictions placed upon your Annual Allowance. Note that this level includes all taxable earnings, such as rental income and dividends.
ii) Money Purchase Annual Allowance
This was introduced in 2015 under the Pension Freedom legislation and aimed to restrict anybody who has drawn some form of taxable income from their pension to a reduced annual allowance level. This was set at £10,000, but significantly, it was reduced to £4,000 in 2017.
The reason this is now important is due to a potential increase in the number of people who have drawn some benefits from their pension over the last 12 months. This may have been required due to a reduction in their income levels, possibly driven by the Pandemic. However, whilst we understand why they have done this, they may not understand the implications of doing so, especially if they have an opportunity to return to the workplace which may also mean that they pay or receive pension contributions.
Just be aware……
As you can see, some of these changes could affect all your pension plans and therefore it is crucially important that you make sure that we have complete information concerning your circumstances.
But just as importantly, all these changes listed above could potentially be mitigated with careful planning. This does not just involve pension planning, but all financial planning. This is why regular review meetings are so important. It is not just whether your own circumstances have changed, but also how legislation changes may have affected you.