We understand you might struggle to find the time for financial planning. We also understand that whilst you may enjoy a higher than average income, you will face unique retirement planning challenges, such as the annual allowance.
When making pension contributions there are allowance both annually and over your lifetime you need to be aware of. The amount you can save in to pensions without incurring tax has already been heavily restricted in the last eight years. Since 2010:
- The lifetime allowance has reduced from £1.8 million to £1.03 million (the maximum you can hold in your pension before triggering a tax charge)
- The annual allowance has been slashed from £255,000 to a maximum of £40,000 (the maximum you can contribute in you pension annually and still receive tax relief)
And it gets worse; for high earners the annual allowance is subject to tapering, a further reduction of up to £30,000, leaving a paltry annual allowance of £10,000 a year.
Anyone earning an adjusted income over £150,000 and a threshold income of over £110,000 will be subject to a tapering. For every £2 over a taxable income of £150,000, your annual allowance will be reduced by £1, capped at a maximum £30,000. Therefore, anyone with an adjusted income of £210,000 or more, will have an annual allowance of £10,000.
At this point, it’s very important to make the distinction between adjusted and threshold income, but before we do, remember; if all this is too complex, we’re here to help!
Adjusted income is all taxable income (earnings, investment income and benefits in kind) plus any employer pension contributions paid in the period, minus any taxed death benefits received.
Employer contributions are added in with the specific intention to nullify ‘salary sacrifice in exchange for employer contributions’ arrangements, as an attempt to reduce your tested income.
If your adjusted income is more than £150,000, it’s time to check your threshold income.
Threshold income is intended to protect people with fluctuating earnings or pension contributions. If your net income (total income as above, less gross personal pension contributions) is less than £110,000 you will not normally be subject to the tapered annual allowance.
Striking a tax-efficient balance between adjusted and threshold income is complex, but achievable. There are situations where manipulating employee and employer contribution can maximise your allowance. Planning opportunities are entirely dependent on your circumstances, so please get in touch if you would like to discuss this in greater detail.
There is a simpler, and potentially greater, planning opportunity to make note of; carry forward.
If you were a member of a registered pension scheme in the last three years and did not make full use of your annual allowances, you can carry forward the unused amount.
For example, if you have an adjusted income more than £210,000 in this tax year (2018/19) you would have a tapered annual allowance of just £10,000. However, if you didn’t make any contributions in the last three years your effective annual allowance will be £130,000. For the last three years the annual allowance has remained at a maximum of £40,000, therefore:
- 2015/16 £40,000
- + 2016/17 £40,000
- + 2017/18 £40,000
- + 2018/19 £10,000
- = an annual allowance of £130,000
In an ideal situation your employer would warn you about the tapered annual allowance and its restrictions. Understandably, it’s complexity means it’s often an issue best tackled by an independent financial planner.
In any case, the level of pension contribution you can make has been heavily restricted over time, and since 2016, limited further by the tapered annual allowance. You can currently utilise carry forward rules, and as a higher earner, often the most tax-efficient way to make pension contributions is unique to you, making advice essential.
Sovereign is proud to be both Chartered and Independent. If you would like to discuss your retirement planning, we offer bespoke arrangements from ‘gold standard’ financial planners.