It’s difficult to avoid reading or hearing about the ongoing NHS staffing crisis, which, allegedly, is connected to the ongoing pension nightmare1 faced by some NHS members. But this clearly affects others in the Private Sector too, potentially more so when earnings can vary during the course of a Tax Year or end of year bonuses are unknown.
The biggest problem can arise for individuals who receive pay rises, or the opportunity for additional work, that then tips them into the £100,000 – £125,000 income band trap (thereby losing part or all of their personal Income Tax allowance and therefore suffering Income Tax rates of 60%), combined with overall annual pension contributions that then exceed the Annual Allowance (particularly, as with the NHS, where individuals are part of a Defined Benefit pension scheme), plus their accumulated pension provision may take them close to the pension lifetime allowance2 (currently £1,055,000). Still following me?!
But it doesn’t end there, if income exceeds £150K in a Tax Year, there’s the potential to trigger the pension tapered annual allowance3 .
Finally, if you’ve ever drawn any income from a pension, you may well be caught by the Money Purchase Annual Allowance4 which restricts annual pension contributions to just £4,000.
Even more confused?
Try not to be, if you can make sense of the above complexity, pensions still remain an astonishingly tax efficient multi-generational planning strategy. You simply cannot match the initial tax relief which boosts any contributions, the virtual tax-free growth whilst funds remain in a pension, the option for 25% of the pension to be taken tax-free and the ability to pass any unused pension down through your family, free of Inheritance Tax.
If you’re bewildered, baffled or lacking a strategy to navigate your way through these allowances, please call us now, don’t pass up on one of the few tax planning opportunities still available to you.
If you would like advice about your pension and use of allowances then please get in touch.
3. Tapered annual allowance (scroll to end of page)