12th June 2015
Higher rate taxpayers should make the most of pension contributions before the emergency Budget, which is expected to cut tax relief.
AJ Bell pensions expert Mike Morrison said savers who pay the 45% top rate of income tax need to construct a strategy to ensure they maximise pensions tax relief on contributions before 8 July.
He said there were short-term planning opportunities to take advantage of because pension changes were almost certain to happen.
Morrison predicted there could be a reduction in the 45% tax relief for those earning £150,000 or more a year, ‘possibly reverting to 20%’, he said.
Or the government could go further and introduce a flat rate of tax relief for all – this idea had been raised by former pensions minister Steve Webb who wanted to introduce a 30% rate of relief for everyone regardless of income tax.
Finally, Morrison said there could also be changes to the lifetime allowance.
‘There are opportunities to maximise benefits before a legislation changes and indeed this might just be a matter of bringing forward an already agreed course of action by just a few months,’ he said.
‘The new pension freedoms rules bring in an extra planning point to any course of action, so why not have the conversation sooner rather than later?’
Morrison said those hoping to access their pension in the next few months under the pension freedoms rules will see their annual pension allowance drop from £40,000 to £10,000, meaning tax relief is only given on £10,000 of contributions.
‘Just a simple two-stage planning process to make sure any large contribution is paid prior to flexibly accessing benefits could we be of value,’ he said.
‘Even the source of contributions is changing. A pension-holder might have the unused relief and the level of earnings to justify a large sweep-up pension contribution but not the cash to pay it.
‘The changing dynamics between pensions and ISAs has meant some advisers are using ISA funds to pay pension contributions. The money paid in receives the tax relief up-lift and access is restored at age 55.’