Freedom is in sight
Freedom is in Sight, But Are You ready?
With Christmas now a distant memory, it’s ‘all hands to deck’ in the financial world, in preparation for the end of the fiscal year. But it’s not the end of the financial year I want you to focus on, it’s the beginning. April 2015 is when new pension freedom becomes a wonderful reality. With less than three months to go, now is the time to start making the most of your pension savings. But why boost your pension pot over other savings vehicles? Well, here’s ten reasons to whet your appetite:
1. Immediate Access to Savings for the Over 55s
We’ve been excited by this prospect for months, but finally pensioners will have more freedom and flexibility with their pensions. From April 2015, the over 55s will be able to take their pension as they choose; whether that’s as a lump sum, ad hoc amounts or a regular income. You’ve always been able to do this with your other investments, so it’s about time that pensions fell into line. And with the added bonuses of tax relief and tax-free cash, pensions will outperform NISAs in the majority of cases. With all of this in mind, clients approaching retirement really should consider investing into their pensions before saving into their other investments.
2. With Flexibility Comes Limits
Like all things in the universe there must be balance, even when it comes to pensions! With flexibility comes limits. If you opt to take advantage of the new income flexibility that your pension can offer, your annual allowance will be slashed down to £10,000 per year. Of course, this does not come into effect until the 6th of April, so you have ample time to plump up your pension savings, if you chose the flexible option.
It’s important to note here that the reduced annual allowance only applies to those who opt for the flexible option. Anyone in capped drawdown before April, or anyone who takes their tax-free cash after April, will still retain the existing £40,000 allowance. There are pros and cons to both options; it really is dependent on your personal circumstances and goals for the future. It is worth talking to a professional Financial Planner to ascertain which route is the best for you.
3. Leave a Legacy to Your Loved Ones (Tax Efficiently!)
New rules could not just benefit you, they could also be fruitful for your family and loved ones. The new Death Benefit rules will make pensions an extremely tax efficient way to pass on your wealth. Typically, there is no Inheritance Tax payable on pensions, if you pass away before the age of 75. In many circumstances, it may be worth moving funds from IHT liable vehicles into your pension, in order to benefit from tax-free investment returns. As long as this is isn’t regarded as deliberate deprivation of assets for your IHT calculation (i.e. if you are suffering from a terminal disease and are obviously moving funds to avoid paying the IHT bill), these funds will be immediately outside of your estate and you will not have to wait 7 years for them to be free of IHT. This means that your loved ones won’t be hit with a large tax bill after you’ve gone.
Estate planning is a complex area, and tax even more so. Before you make any decisions about how to mitigate your tax liability, it is paramount that you talk to a professional who specialises in this area.
4. Get Personal Tax Relief at Top Rates
If you are self-employed or rely on a performance based salary to pad out your earnings, it is likely that you are unsure about what your income will be next year. If you are in this situation, a pension contribution now will secure your tax relief at your higher marginal rate. This is also ideal for clients who are higher or additional rate tax payers and want to maximise the amount of tax relief they can receive. The flexing of the carry-forward and PIP rules will mean that some people have the scope to pay up to £230,000 tax efficiently in 2014/15. For example, an additional rate tax payer, who fears that their income may dip below £150,000 next year, could potentially save up to an extra £5,000 on their tax bill, if they had the scope to pay £100,000 now.
5. Pay Employer Contributions Before Corporation Tax Relief Drops Further
In 2015, Corporation Tax rates are set to fall to 20%. If you own your own company, you may want to bring forward pension funding plans to benefit from tax relief at the higher rate. Until the 1st of April 2015, the main rate for Corporation Tax is 21%. To take advantage of higher rate tax relief, companies may want to consider making employer pension contributions before the end of the current business year, whilst rates are still at their highest.
6. Don’t Miss Out on £50,000 Past Allowances
The annual allowance seems to be increasingly cut year on year, but carry-forward rules still offer a glimmer of hope. For the years 2011/12 and 2012/13 the carry forward is set at £50,000. This means that, providing that you didn’t contribute to your pension in these years, up to £190,000 can be paid into your pension this tax year without triggering an annual allowance tax charge.
For each year that passes, the £40,000 current allowance dilutes what can be paid. By 2017/18, the carry forward will have dropped to £160,000, and that is not taking into account any further cuts to the annual allowance. To maximise how much you can benefit from carry-forward, the next two months is the time to take action.
7. Use Next Year’s Allowance Now
If you are in a fortunate position of being able to pay more than your 2014/15 allowance into your pension now, and you’ve already used up any unused allowance from previous years, this one is just for you. If you close your 2014/15 PIP early, you will be able to pay an extra £40,000 in this tax year (in respect of the 2015/16 PIP). Realistically, this strategy is most relevant to clients with a particularly high income who want to make the biggest contribution they can with 45% tax relief. It could also be beneficial for business owners, who have had a particularly good year, and want to reward Director’s and senior employees and, in turn, reduce their Corporation Tax bill.
These are quite technical strategies and, as they involve tax, we highly recommend that you talk to a professional before putting anything into place.
8. Recover Personal Allowances
Pensions are so valuable because they reduce an individual’s taxable income and are a great way to reinstate the personal allowance. If you are looking to boost your pension and reduce your tax bill, this is a great way to achieve both. For example, for a higher rate tax payer with a taxable income of £100,000 and £120,000, an individual contribution that reduces the taxable income to £100,000, would achieve a tax relief rate of 60%.
9. Avoid the Child Benefit Charge
If you have children, then Child Benefit can be a valuable addition to your income. Unfortunately this payment can be lost due to the tax charge, if the taxable income of the highest earner exceeds £60,000 per annum. So how can you avoid this happening, without taking a pay cut? And how can your pension benefit too?
Pension contributions reduce your taxable income, so the tax charge on the Child Benefit can be avoided and the value of the benefit is retained for the family. The combination of higher rate tax relief on the contribution, plus the Child Benefit Tax charge saved, can lead to effective rates of tax relief as high as 60%. So it’s win, win.
10. Sacrifice Bonus for Employer Pension Contribution
March and April are typically the months where companies pay annual bonuses. But rather than simply taking the bonus as part of your taxable income, it may be worth opting to sacrifice the bonus for an employer pension contribution instead. If done before the end of the tax year, there can be several positive outcomes.
Firstly, the employer and employee National insurance savings made could be used to further boost pension funding, giving more in the pension pot for every £1 lost in take home pay. The employee’s taxable income is also reduced, potentially recovering the personal allowance or avoiding the Child Benefit charge.
Whether you’re looking to reduce your tax bill, provide for your loved ones or maximise your retirement funds, a pension is a fantastic vehicle that can really help. By enhancing your pension pot and taking advantage of current rates now, you are putting your future self in a much stronger financial position. If you have big plans for your retirement, you need to start planning, and the next two months are the very best time possible.
If you would like to talk to us about your pension, your estate planning needs or how to achieve your goals, we’d be delighted to hear from you. Call 01572 898060 or email firstname.lastname@example.org.