Pension Tax Relief – Going, Going, Gone?

Due to recent changes in Legislation, funding pensions has never been more attractive:

  • Pension contributions made by Limited Companies on behalf of Directors are fully allowable business expenses.
  • Personal Pension Contributions attract income tax relief at the individuals’ highest marginal rate; so potentially 60% effective income tax relief.
  • Growth accrues within an extremely tax efficient environment.
  • Pension funds have the ability to borrow and purchase commercial property and/ or land.
  • Pension funds are potentially wholly accessible from age 55 onwards - as a lump sum if necessary.
  • Pension Funds are wholly exempt from inheritance tax.

However, as the old saying goes “all good things must come to an end” and the Chancellor somewhat signalled his intent on this matter when he opened a consultation period on the future of pensions tax relief in his July 2015 Budget Statement. Given the distinct possibility of future changes, we would encourage you to both review your existing pension arrangements and consider making pension contributions prior to 5th April 2016, as:

  • Tax relief on pension contributions is likely to be slashed, or removed altogether in the March 2016 Budget Statement – Pensions Tax Relief costs the Government more than the entire UK Defence Budget.  As a result, there is now a very high probability that tax relief on pension contributions will be slashed to a new flat rate or, more worryingly, abolished altogether. You therefore need to give serious consideration to funding your pension before March 2016, which means taking action now.
  • Further reduction to the lifetime allowance – The maximum amount that can be accumulated within pensions will be further restricted from 6th April 2016 when it has been announced that the ‘Lifetime Allowance’ will be reduced further.  Any excess pension savings will be taxed at 55%.  You can elect to lock-in your Lifetime Allowance at the current level but, again, there is a very limited window of opportunity, so action needs to be taken now.
  • Restriction of tax relief on high earners – Those earning above £150,000 per annum (inclusive of employer pension contributions) will see a reduction in their tax relieved pension limit to as low as £10,000 from 6th April 2016.  If you want to make significant pension contributions and maximise tax reliefs, action needs to be taken immediately.
  • Is your existing pension fit for purpose? – The vast majority of UK pensions do not allow you to take advantage of the new Pensions Freedom legislation.  As a result:
    • Most pensions do not allow you to drawdown benefits as and when you want to, thus creating potentially huge and wholly unnecessary income tax liabilities on vesting, with possibly the only alternative being annuity purchase.
    • Pension death benefits will potentially be subject to wholly unnecessary tax charges of up to 45%.

    It is therefore essential that you review your pension and, if not fit for purpose, consider transferring to a pension plan that is ‘Freedom Friendly’, thus securing full income/ lump sum flexibility and ensuring that there are no unnecessary tax charges on death.

In summary, we believe that an immediate review of your pension provision is essential and that you act quickly, as the time to obtain substantial tax relief is rapidly running out.