Budget Pension Changes

Investors have a window of opportunity to make the most of pensions tax relief before the current system changes; none more so than top earners who have already been served notice and who can claim up to £81,000 in tax relief in the current tax year before having their allowance slashed next year.

Tom McPhail, Head of Pensions Research: “The Chancellor hit the reset button on the Annual Allowance for the current tax year, giving most people the opportunity to pay in £40,000 from today, even if they have already made contributions in the current tax year. He also spoke about making pensions more like ISAs, which would mean the loss of the upfront tax relief. Whilst we don’t know what the outcome of the consultation will be, the message is very clear; make the most of the tax breaks while you still can.”

As part of the tidying up process, the Treasury has given most investors a new £40,000 Allowance for the rest of this tax year. From April 2016, the Annual Allowance taper will come into effect.

Pension schemes all operate an administrative arrangement called Pension Input Periods, which mean that a contribution paid to a pension in one tax year could be tested against an Annual Allowance in a different tax year. They are the work of the devil and have no place in a civilised society. From 2016, they will all be aligned with the tax year, which will significantly reduce their influence, however between now and then, the transitional arrangements give everyone a new £40,000 limit unless they had already contributed more than £40,000 to their pensions between 6 April 2015 and 8 July 2015.  Employer contributions and the value of benefits built up in final salary pension schemes also need to be included.