Pension allowances: the last chance

The new tax year heralds two significant changes in pension rules which could affect your clients, both now and in the future.

Lifetime allowance cut to £1 million

Yes, we’ve been here before in 2012 and 2014 but perhaps this is the most significant reduction of all.

From April 2016, the lifetime allowance (the total pensions savings your clients can accumulate before
paying tax) will reduce from £1.25 million to £1 million. This will increase the number of pension savers affected and as a consequence, significantly increase the number of people who must seek guidance before April 2016.

Considering that someone with a pension fund of £780,000 today will breach the lifetime allowance in 10 years’ time if it achieves a real rate of return of 2.5%, this should really focus those who don’t think it could
be a real issue. Plus, that’s without taking into account any further contributions into the pension!

We now know how HMRC will allow people to register for protection against a lifetime allowance tax charge, but the real concern here is that many clients could quite easily breach the allowance without realising.

Reduced annual allowance for high earners

Some high earners will face a cut in the amount of tax-efficient pension contributions they can make from 6 April 2016.

The standard £40,000 annual allowance will be reduced by £1 for every £2 of "adjusted income" individuals have over £150,000 in a tax year, down to a minimum allowance of £10,000. However, there is a second income test so not everybody earning more than £150,000 will have their allowance reduced – speak to an adviser if you think your client may be affected.

Clearly, for many people guidance will be required now. Having a basic understanding of which of your clients may be impacted will allow you to refer them to a financial adviser and add real value to your relationships.