22nd January 2016
High earners will be hit by a reduction in the amount they can save into their pension from April, and face large penalties if they exceed their allowance.
From April, those whose income exceeds £150,000 or more a year will see their annual pension allowance eroded. High earning individuals in the private and public sectors will be hit, including GPs, civil servants, long-serving teachers and senior police officers.
Steve Moy, wealth management consultant at St James’s Place said the annual allowance is currently £40,000 but from 6 April 2016 this figure will reduce by £1 for every £2 of income earned over £150,000, until it reaches a floor of £10,000.
This means those earning over £210,000 will not be able to put more than £10,000 into a pension.
Moy said the income is not just salary, but any other earned income, such as buy-to-let rental income and savings.
‘To add more twists to an already tangled scenario, what will be tested against the annual allowance is ‘adjusted income’, which isn’t as simple as just ‘salary’,’ he said.
‘Adjusted income includes the value of employer pension contributions as well as income from sources unrelated to employment, such as savings and property. It is estimated that those with salaries of £90,000 or more could be affected.’
Those who are contributing to a defined contribution (DC) scheme will find it easy to know when they have reached their target allowance but for those in defined benefit (DB) schemes it will be more difficult.
‘For anyone contributing to a defined contribution pension themselves, your total contributions should always stay within your allowance,’ said Moy.
‘Anyone who benefits from an employer contribution has a potentially more challenging scenario. If your overall pension contributions are greater than that permitted by the taper, then a discussion with your employer is needed. You need to decide whether to stop contributions or be remunerated in a different way, for example a bigger salary in lieu of employer contributions/
‘Members of a final salary scheme have arguably the greatest challenge of all. Most members don’t know how much their ‘pension input amount’ is for the year. A factor of 16 is applied to the promised pension at the start of the year. Once adjusted for inflation, the figure is subtracted from the equivalent closing value 12 months later. This can then be used to compare against the individual’s annual allowance.’
He said anyone who goes over the allowance will face a tax charge of 40% and although carry-forward rules allow individuals to use up unused allowances from the past three years, advice will be needed.
‘It’s tremendously complicated, so I don’t recommend anyone makes a decision without getting advice first,’ said Moy.
‘Any unused allowance from the previous three years could counter any breach, but eventually an individual may run out of unused allowance, thereby triggering a tax charge of 40% for overpayment.
‘Anyone with a money purchase or final salary pension who earns close to, or over, £100,000 a year should seek advice before April to determine how much can be put away in a pension tax-efficiently. If the annual allowance taper is an issue, then there could be other tax-efficient ways to save for retirement.’