If there was ever a time to review your pension provision, it's now.
2015 was a momentous year for changes in pensions and 2016 looks set to be no less eventful. A severe cutback in tax-relievable pension contributions for high earners, the end of contracting out for final-salary schemes and the start of a new State Pension scheme in April, not to mention a further fall in the lifetime allowance, are just some of the issues to be considered when doing your retirement planning this month.
Changes to tax relief
A major tapering in the amount of tax relief higher earners can have on pension contributions is due to come into force from 6 April 2016. The current annual pension contribution limit of £40,000 will be reduced by £1 for every £2 of earnings in excess of £150,000, so anyone earning £210,000+ will be restricted to annual contributions of just £10,000 a year, with no tax relief available for pension contributions in excess of this figure.
In case further changes are announced in the 16 March budget - for example, a cut in the rate of tax relief on pension contributions - it is even more important that higher earners maximise pension contributions before then. The Treasury is known to favour introducing a flat rate of tax relief in the range of 25-33 per cent for everyone.
However, investors who have arranged any form of fixed Pprotection against the lifetime allowance (currently £1.5m, but due to fall to £1m from 6 April 2016), must avoid making any further contributions, or accepting any final-salary scheme accruals, as these would render their protection null and void.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: "Any higher-rate taxpayer should be reviewing their pension arrangements before the Budget and assessing whether they want to carry forward any unused pension contribution allowances from the three previous tax years. If ever there was a time to review your pension arrangements, it is now. We already know about the tapering of the amount you can contribute with tax relief, but any change - for example, to a flat rate of tax relief at 30 per cent - could apply immediately from the day before the Budget, [ie, 15 March]."
Carry forward, whereby any unused annual allowances for the previous three tax years (£50,000 for 2012-13 and 2013-14 and £40,000 for 2014-15) can be added to the £40,000 allowance for 2015-16 and will attract full relief at 40 or 45 per cent, potentially on up to £180,000 and could generate tax relief of up to £81,000 for a 45 per cent taxpayer.
However, using carry forward is subject to you having sufficient pensionable income in the current tax year and your pension input period and your lifetime allowance arrangements allowing such large contributions to be made.
Transitional rules introduced in the Budget on 8 July 2015 mean that there is an annual allowance of £80,000 for the current tax year, although only £40,000 of this can be used between 9 July 2015 and 5 April 2016.
This is a complex area as pensions are currently subject to a lifetime allowance cap of £1.25m, due to fall to £1m from 6 April 2016, so seek specialist tax advice.
If you earn between £100,000 and £121,200, your personal tax-free allowance of £10,600 is reduced by £1 for every £2 of earnings above £100,000. This means that pension contributions in this bracket would effectively provide tax relief at up to 60 per cent (40 per cent tax relief, plus 20 per cent from clawing back your personal allowance).
You could also consider making contributions of up to £3,600 into a pension scheme for a spouse, civil partner or child, if they have no earnings of their own, to obtain basic tax relief on the contributions (the net contribution is £2,880, with HMRC topping this up with £720 in tax relief).
End of contracting out for final-salary schemes
6 April 2016 also marks the end of contracting out for final-salary schemes, which will result in increased National Insurance (NI) contributions for scheme members and could precipitate another round of scheme restructuring or closures.
For employees, this will mean an increase in NI contributions of 1.4 per cent on incomes between £8,060 and £42,380, the equivalent of up to an extra £40 per month in tax. For employers, the impact is even worse, with their NI costs going up by £97 per month for each scheme member.
Mr McPhail says: "If you are a final-salary scheme member, you will see a cut in your take-home income and will need to watch out for your employer making adjustments to your final-salary scheme, assuming that your employer has a contractual right to do so. This is another reason to review your pension arrangements.
"If your employer does not already operate salary sacrifice for pension contributions, your employer might consider this as a way of reducing costs, but be aware that salary sacrifice may also be targeted by the Treasury as part of its pension taxation review."
State Pension reform
6 April 2016 also sees the start of a new flat-rate State Pension, which is fiendishly complicated, prompting the DWP to produce this 38-page explanation:
You will need 35 years of qualifying NI contributions to be eligible for a full basic state pension of £151.65 per week. To check your record, ask for a State Pension forecast to be sent to you by phoning 0345 600 4274. This will show your 'starting amount' which will include a 'contracted out deduction' (COD) for any years when you were contracted out of Serps.
If you were contracted out through a final-salary scheme, it will reflect the years when you and your employer benefited from paying lower NI contributions. If you contracted out using a personal pension plan, you will have benefited from NI rebates and tax relief paid into an "appropriate personal pension".
Malcolm McLean, a pensions consultant at Barnett Waddingham, says: "Anyone who has contracted out in the past can claw back the contracted out deduction if they are working and pay NI contributions from 6 April 2016 onwards, until their state pension age.
"This applies even if you have already built up 35 years of NI contributions by 6 April 2016. So from 6 April 2016, the 35-year rule effectively goes, because you can continue contributing to your state pension, providing you do not exceed the full weekly state pension amount, currently £151.66."
For each year of NI contributions made after 6 April 2016, you can earn 1/35th of the prevailing weekly basic state pension rate, so you could increase your basic state pension by 1/35th of £151.65, or £4.33 a year in 2016-17, and so on until you reach state pension age.
If you are no longer working and wish to plug gaps in your NI contribution record, you can make voluntary Class 3 NI contributions. (https://www.gov.uk/voluntary-national-insurance-contributions)
Other opportunities for pension planning
Elsewhere, there is a forthcoming pension freedoms exit penalty review, which will look at the swingeing penalties still applying on the transfer out of old pension contracts dating back to the 1980s and 1990s. These contracts were designed to claw back high upfront commission over the term of the contract.
If the government acts to limit, or abolish, transfer out penalties on such contracts, this could present an opportunity to consolidate legacy pensions by transferring them penalty-free into a lower cost and a more flexible personal pension plan.
Danny Cox of Hargreaves Lansdown says: "You should be looking at consolidating pensions anyway as many of these legacy pensions are high cost, inflexible and run by aggregator companies who provide poor investment performance and service. Other housekeeping exercises include reviewing regular pension contribution levels and the investment performance of your funds."
The joint Treasury/FCA Financial Advice Market Review is expected to report in time for the 16 March budget. This could free up access to low-cost simple advice and guidance to help people plan their finance and address the advice gap around taking benefits from a pension.
Richard Parkin, Fidelity head of retirement, warns: "While April will see changes, it will most probably be March that sees the biggest overhaul, with the chancellor expected to announce his plans for pension tax relief. As with all recent changes, expect a short timeline for implementation."
