Expert Opinion: Are you taking advantage of pension contribution allowances and incentives?

Ahead of the Budget, Simon Chatterton, Partner at S & T Wealth Management, discusses the incentives available to you while building your pension portfolio and the possible scenarios being debated ahead of the Government’s Autumn budget on 30^th October.

It is important for investors to regularly review and obtain the correct advice from their advisors to ensure they are taking advantage of current contribution allowances and incentives. These allowances carry attractive tax benefits, especially for Higher and Additional rate taxpayers.

For Basic Rate taxpayers, the government give you 20% when you add money to your pension. An investor who contributes £80 will receive an extra £20 from the government. 

Higher Rate taxpayers who contribute, for example, £6000 will receive £4000 from the government while Additional Rate taxpayers will get up to 45% provided sufficient tax is paid at the higher rate; you are under 75 years of age.

There are limits on how much you can contribute: the annual allowance is currently £60,000, although this can be lower for higher or additional rate payers.

The value of your pension portfolio may impact the amount you contribute to it or, when you do retire, how much you can take out to better manage and safeguard your income during retirement.

So looking ahead to the budget at the end of the month, what possible changes do you think the Government are discussing?

Given the incentives for Higher and Additional Rate payers to contribute to pensions as detailed above, there is talk the Government might look to reduce the tax benefits for higher earners. At this point it is only speculation, but it would make contributions less attractive to many by removing these incentives. Against this the Government need individuals to save for their own retirement to reduce the future burden on the state, so there needs to be a fair balance. 

There has also been speculation as to whether the Government will retain the advantageous tax benefits on contributions but then increase the tax burden on withdrawal.  This could be done through a reduction in the 25% tax free lump sum element; however, former pension minister Steve Webb says he thinks an outright abolition of this is unlikely due to the political outcry it would incur.

At present, 25% of a pension can be taken tax free up to a limit of £268,275.

Money in pensions is treated differently to other assets on death; pensions are considered outside a person’s estate if the person dies before age 75. This makes for an attractive IHT planning vehicle because many wealthy individuals choose not to draw on their pension assets in old age if they have other assets to sustain them.  This ensures more of their estate passes to their beneficiaries. But, if the money is passed after the person is 75 then it is taxed at the rate of the beneficiary.”

Labour has said it will not raise Income tax, National insurance or VAT, so how will it look to fill the £22 billion black hole?

The Government may consider other options available to them. For instance, Capital Gains Tax (CGT) is currently paid by a relatively small number of the population. It could be changed by increasing the percentage payable on gains or by including additional assets. The rate payable depends on the asset type.

On Inheritance Tax (IHT), everyone has a personal allowance when they die which is subtracted from their assets before they pay Inheritance tax.  This figure could be reduced or the percentage payable to be varied.  There is also an allowance for the main home (subject to the value of the estate) – this could be varied.

Changes to Business Relief (BR) could be another option for consideration. It has been particularly useful for family businesses where, if full IHT was to be applied, a forced sale may be needed. It therefore allows passing to the next generation although, Business Relief is only available if the deceased owned the asset for at least 2 years before they died.

It is important to seek full advice before any investment to ensure suitability beforehand.

Shares & the income from them can go down as well as up & you may not get back all or any of the amount invested. Past performance is no guarantee to future performance.  If in doubt as to how to proceed you should seek independent advice.