If you’re a high earner watch out for the pensions minefield

Jul 27, 2016 | Tony Byrne's View

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Do you earn over £150,000 per year? Have you recently started making flexible withdrawals from your personal pensions? Do you have a final salary pension?

If you answer yes to any one of these questions, then recent changes to pension rules could now mean you have a number of ‘traps’ to navigate around.

For the last 2 years the total gross amount you can contribute to pensions in any one year has been £40,000. However, since the start of the latest tax year a new rule has been introduced which reduces the allowance available on a sliding scale for ‘incomes’ over £150,000. As with most government legislation the reduction is not simple. ‘Income’ can include other payments such as employer pension contributions on your behalf, perhaps through auto-enrolment.

The new ‘pension freedoms’ announced by the Chancellor back in 2015 have been much publicised and were a welcome option for the over 55s looking to access their pensions. If you’ve recently taken money out of yourpension using the new flexible rules, perhaps a one off lump sum or a regular income, then you may find the amount you can now contribute to pensions going forward is reduced to a maximum of £10,000 gross per annum.

This can be very damaging for people who do not realise this and are still contributing to their pension or have recently joined their company’s new pension scheme. Do you know how much you are contributing? Now is definitely the time to check!

If you’re lucky enough to have a final salary pension, either in payment now or at some point in the future, then good news. However, there is now a limit on the total amount of money you can have in pensions (called the Lifetime Allowance). This includes ALL types of pension such as final salary, personal and company pensions. The limit has been reducing significantly over the last few years and is now £1 million. When adding up all the values from your latest pension statements you may find you are well below the £1 million allowance. However final salary pensions don’t really have an overall value as such and therefore have their own rules in terms of how the value is calculated. You need to multiply the annual income by 20 and then add on any lump sums due. This can significantly increase your overall pension value and mean you are close to or over the Lifetime Allowance.

As you can see from just a few examples above, there is now a lot of complexity when saving for your retirement. The penalties for falling foul of these rules can be severe, resulting in high tax penalties such as a 55% charge on excess pension over the Lifetime Allowance. Luckily there are ways to legally avoid much of the charges but it takes time, planning and skill.

The sooner you start, the better.

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.

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