Steve Webb, the ex-pensions minister, recently awarded a Knighthood and now the Director of Policy at Royal London, has a financial agony column with the Daily Mail “This is Money” website. (see here for full article; http://www.dailymail.co.uk/money/pensions/article-3990296/I-don-t-pay-tax-pension-tax-relief-Steve-Webb-replies.html). In a past week’s column he was asked how someone without taxed income can get tax relief on their pension contributions, as they are currently not receiving them.
People with no taxable income can get the equivalent of a 20% uplift in the value of their pension contributions to a maximum of £2,880 net, £3,600 gross in each tax year. This is made up of £2,880 actual cash from the pension holder and £720 claimed by the pension provider from HMRC on the holder’s behalf.
Unfortunately, Mr Webb’s correspondent was not receiving the tax relief as he was paying into a “Net Pay Scheme”, which did not apply it automatically and had no mechanism to claim it later. Thankfully, most Group Personal Pensions use the relief at source method, so this should not be a problem for most people.
As a pension is treated as earned income at retirement, there is a tax planning advantage for any couples where both partners can build up a pension pot sufficient to use up some or all of the annual individual income tax allowances. Where one partner earns a great deal and the other very little, both should pay into a pension to make the most of the pension allowances on saving money and the income tax allowance on spending it!
As an IFA, I have met quite a number of couples where one earns a lot of money and the other partner earns comparatively little; like a General Practitioner and an art potter, a chartered accountant and a nursery nurse and a company CEO and the manager of a youth centre. They would all benefit by ensuring that some pension is paid on behalf of the lessor paid partner to use up individual tax allowances.
Another issue in pension tax relief that will come to bite more people in later years is the restriction on pension premiums once you have started to take a drawdown pension income. Phillip Hammond announced that the Money Purchase Annual Allowance would be reduced from £10,000 per annum to only £4,000 in April 2017. For someone expecting to top up their pension funds in subsequent years, this could be a major blow. The Saturday Telegraph gave details of someone who fell foul of the changes, (see here; http://www.telegraph.co.uk/pensions-retirement/financial-planning/governments-latest-pension-crackdown-will-force-back-work/).
This cap on allowances only occurs when income greater than the 25% tax free cash is taken, so provided you have not already taken too much income, you can avoid the cap on new pension premium. There is also an exemption for annuity purchases, so there is an alternative way to take income, but to make sense of this and other quirks and pitfalls, seeking formal advice is going to be helpful.
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.