£10,000 personal allowance – a huge opportunity for pension planning says Prudential

20th March 2013

The personal allowance of income tax will increase to £10,000 in April 2014 with pension experts saying this offers a big pension planning opportunity particularly for couples. The allowance is due to increase to £9,440 from next month but will now rise to £10,000 in April 2014 a year earlier than previously planned. Accountants have pointed out that for those earning more than £100,000 the Chancellor has retained the clawback provisions so they will not benefit.

The move is a big win for the Liberal Democrats, who developed the policy but it is also popular among Conservatives.

Vince Smith-Hughes, retirement expert at Prudential says: “Raising the personal income tax allowance to £10,000 from April 2014 is great news for pension savers. If a married couple are able to equalise their pension pots, huge amounts of money could potentially be saved in retirement by using both personal allowances which will be worth £10,000 each.

“However, this needs to be planned well in advice of retirement as it may involve having to reduce one party’s pension contribution to fund the other. The prize of £20,000 per couple of tax free income though is a good one, and worth planning for.”

“By liaising with your pensions provider, it will be possible to divert some of your pension payments into your spouses’s pension. As well as ensuring that this doesn’t interfere with any additional employer contributions which you may receive, it is also important to consider this at least ten years before retirement, in order for it to be worthwhile.”

Prudential has provided the following worked examples.

Worked examples:

A 65 year old man with a £30,000 pension pot will receive £955 per year (best in market rate – 3% escalation). If it is taxed at basic rate, the annuitant will lose £191 per annum (ie £955 /20% = £191). By putting this £191 into a pension pot accumulated in his wife’s name – as a non-tax payer – the couple will save £191 per year, or £3,820 over a 20 year retirement, without any additional expenditure.

A 65 year old man with a £50,000 pension pot will receive £1,591 per year (best in market rate – 3% escalation). If it is taxed at basic rate, the annuitant will lose £318.20 per annum (ie £1,591 /20% = £318.20 ). By putting this £318.20  into a pension pot accumulated in his wife’s name – as a non-tax payer – the couple will save £318.20  per year, or £6,364 over a 20 year retirement, without any additional expenditure.

A 65 year old man with a £75,000 pension pot will receive £2,378 per year (best in market rate – 3% escalation). If it is taxed at basic rate, the annuitant will lose £475.60 per annum (ie £2,378 /20% = £475.60). By putting this £475.60 into a pension pot accumulated in his wife’s name – as a non-tax payer – the couple will save £475.60 per year, or £9,512 over a 20 year retirement, without any additional expenditure.

Accountants, while welcoming the move, have warned that it will not necessarily benefit higher earners.

Katharine Arthur, Tax Partner MHA MacIntyre Hudson said:  “The personal allowance – the amount of income an individual can earn before paying income tax – will be increased to £10,000 in 2014-15, a year earlier than planned. This increase, claimed to ensure 3 million people will pay no income tax, delivers one of the Liberal Democrat’s election manifesto promises and will be welcomed by many. It represents an increase of over 20 per cent on the personal allowance for the current tax year (£8,105). The personal allowance will then increase in line with inflation (based on CPI) in future years, starting from 2015-16. As announced in Autumn Statement 2012, the higher rate threshold, which equals the sum of the personal allowance and the basic rate limit, will be increased by 1 per cent to £41,865 in 2014-15.”

Nigel May, Tax Partner, MHA MacIntyre Hudson says: “The increase in personal allowances will give no benefit to high earners. The Chancellor has retained the personal allowance claw back where income exceeds £100,000. This will mean an effective tax rate of 62 per cent on incomes between £100,000 and £120,000 for 2014/15.”

 

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