What Tax Changes Will Do To Your Pension Part Ii

What tax changes will do to your pension: Part II


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What tax changes will do to your pension: Part II

What course of action can I take?

If your pension is being saved in a money purchase plan keep your eyes open for details of the new Annual Allowance rate. Change the level of contributions you make to your pension plan if necessary and talk to your employer about doing the same. Those with final salary plans need to talk to their employer or pension manager to see what you are able to do in order to alter your plan so that you avoid a large tax bill.

What is the situation with one-off contributions?

You still need to factor in the rate of the new Annual Allowance as every single pension contribution you make counts towards it. Therefore, a large, one-off contribution that exceed the limit will be taxed like everything else.

What is the potential level of tax?

Naturally, it depends on your circumstances and how much you earn but below are some examples. As it is uncertain what the new allowances will be we are taking the Annual Allowance as £40,000 and the Lifetime Allowance as £1.5 million for the sake of calculating the following examples. Also, a factor of 15 times is used when it comes to dealing with final salary benefits and the Annual Allowance.

Scenario One

This saver places £1,000 a month into their pension and their employer matches that. Also, an annual contribution of between £10,000 and £20,000 per annum has also been made depending on annual bonuses. As their annual savings comes to £24,000 they will not be affected but if their extra annual contributions are greater than £16,000, they will have to pay extra tax so they must cap their saving at that level.

Scenario Two

This individual has been part of a final salary scheme for 25 years and has an annual salary of £50,000. As their scheme benefits are built up at a rate of 1/60th of their salary, their accrued pension is 25/60th of £50,000 which results in a pension saving of £20,833 per annum. Should they receive a pay rise of £2,000 for the next year, their accrued pension comes to 26/60th of £52,000 per annum or £22,533. This means that their increase of £1,700 will be multiplied by 15 equalling £25,500 which is much less than the Annual Allowance.

Scenario Three

However, if the person in scenario two enjoyed an increase in their salary of £10,000, things would be a lot less rosy. Their accrued pension would suddenly be 26/60th of £60,000 which is £26,000. This would represent an increase of £5,167 which when multiplied by 15 equals £77,505. This is £37,505 above the Annual Allowance and a 40% tax charge leaves them with a bill of £15,002 per annum, far more than their wage increase. The government has admitted that situations like this may happen and are looking at ways to deal with them. They may for example allow savers to spread these payments out over a few years.