While the 2016 Budget did not produce any major headlines for pension savers, there were significant changes to the pension system announced in previous years that could affect you. These include the reduction in lifetime allowance and the tapered annual allowance. You can find out more about these key changes and consider how you can make the most of the current tax relief system below.
The annual allowance is a limit on the amount that can be contributed to your pension each year while still receiving tax relief. For the current tax year it is capped at £40,000. You are currently entitled to tax relief on pension contributions up to the total amount you earn in a year, or £40,000 (the ‘annual allowance’), whichever is lower.
It may be possible to pay in more and still benefit from tax relief through the carry forward rule. Find out how it works and how you may be able to make higher tax-efficient contributions in our factsheet.
However, recent changes to the pension rules mean if you earn more than £150,000 your annual allowance may be reduced. Take a look at the ‘Tapered Annual Allowance’ tab for more information.
If you’ve already taken benefits from your pension a lower annual allowance limit of £10,000 may apply. Download our factsheet for more information.
The new tax year sees some major changes to pension rules for high earners.
From 6th April the amount you can tax-efficiently invest in your pension could be reduced. For most people the annual allowance is usually £40,000 but this will be tapered according to your income. Anyone earning over £150,000 could be affected and those earning more than £210,000 could see their allowance reduced to £10,000.
While the Chancellor may have deferred making any changes to pension tax relief, the will he/won’t he debate that took place before the Budget has, if anything, highlighted the importance of this valuable benefit. Read our factsheet to find out more about how to make the most of any outstanding allowances.
Don’t forget, you will only get tax-relief on contributions up to the amount you have actually earned and you must have been a member of a UK registered pension scheme in the relevant tax year from which you wish to carry forward from. Read our 'tax relief' factsheet to find out more.
To maximise your contributions and tax relief further, you could also carry forward any unused allowance from the last three years - you might be able to contribute up to £170,000 to your pension whilst benefiting from tax relief.
From 6th April, the lifetime allowance has been reduced from £1.25 million to £1 million.
If you think your pension savings could exceed the lifetime allowance by the time you retire, then you have the option to apply for protection.
Please remember, the value of investments can go down as well as up so you may not get back the amount you originally invest. You cannot normally access money invested in a SIPP until the age of 55. The eligibility to invest in a pension depends on individual circumstances and all tax rules may change in the future. Fidelity Personal Investing only gives information about products and services and does not provide investment advice based on individual circumstances. If you are unsure of the suitability of an investment you should speak to an authorised financial adviser.
Don’t delude yourself that your home is your pension.
By Emma-Lou Montgomery, 20 July 2016.
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