The seemingly never ending change to pension legislation was exacerbated by last week’s Autumn Statement.
The Government’s focus on containing the costs of pension tax relief was highlighted by a two- pronged attack on the annual amount of future relievable pension savings and a further reduction on the lifetime allowance.
It is good news from an industry perspective that these changes will not come into effect until the start of the 2014/15 tax year, allowing clients and advisers to review current circumstances and have time to act appropriately.
However the wider message being delivered to UK savers creates further uncertainty as to longer term use of significant pension savings as part of a retirement income strategy.
In looking at the detail of the announcements, there are lots of planning opportunities that will exist for the right clients over the next 15 months or so and provide significant opportunities for advice in the post RDR world for advisers.
Here is a summary of some of these key opportunities.
The reduction in the annual allowance to £40,000 will not happen until the start of the 2014/15 tax year. Even at that point, the current £50,000 annual allowance will remain available, where carry forward of unused annual allowances is being used as a funding exercise for input periods ending in the tax years 2011/12; 2012/13 and 2013/14.
Whilst this will give investors opportunities over a number of years to continue to fund contributions at largely existing levels there are some shorter-term planning opportunities to use the current regime sooner rather than later.
Although not confirmed in the Autumn statement, the Chancellor had previously signposted a possible reduction in additional rate tax from 50 per cent to 45 per cent from the start of the 2013/14 tax year.
Additional rate taxpayers should therefore consider making contributions this tax year to the extent of their tax liability, as a means of reducing the net cost of the pension investment.
For others, the ability to use the combined allowances to reduce their adjusted net income below £100,000 will be important.
In doing so, they will be able to regain their full personal allowance for this and/ or the next tax year with an effective marginal rate relief of 60 per cent on the element of contribution that reduces adjusted net income from £116,210 to £100,000.
Life Time Allowance
With the lifetime allowance being reduced from £1.5m to £1.25m from the start of the 2014/2015 tax year and the option to apply for fixed protection on of the £1.5m allowance, it is important for investors to use their current annual allowance and utilise any carry forward of earlier unused allowances. There may be an opportunity through the use of pension input period planning to fund the 2014/15 annual allowance before the end of next tax year and then register for the new form of fixed protection.
Mention of fixed protection brings me onto the other part of the attack on the level of tax relief available for pension savers – that of the reduction in the lifetime allowance from the start of the 2014/15 tax year. This further 16.67 per cent reduction in the lifetime allowance, that back in 2010/11 was understood would not be reduced, will take more clients out of the registered pension scheme market in terms of future accrual beyond the start of the 2014/15 tax year.
This not only affects clients with existing large pension scheme values, but clients with longer term views as to when they may be looking to access their existing pension savings. Clients will have to consider what levels of future pension savings that may be needed to ensure they keep within the reduced lifetime allowance.
This will create lots of advice issues that need to be included in this area:
Investors may wish to change investment strategies for their money purchase pension savings to reduce risk in their portfolio. Whilst this may have the disadvantage of limiting potential future growth, the upside is that they can still continue to benefit from immediate tax relief on further funding using registered pension savings and keep on target to the future lifetime allowance
If they decide to ‘opt-out ‘ of registered pension scheme savings, what other strategies for continuing to build retirement income will need to be considered
Where individuals are currently receiving employer contributions and decide to elect for ‘fixed protection 2’ at the end of 2013/14 tax year how, if at all, will an employer be compensating future loss of pension contributions.
Personalised Protection Option
To potentially complicate matters further, the Government will also be consulting on a new form of protection, the personalised protection option.
Under this new option individuals will be able to apply for a personal lifetime allowance of between £1.25m and £1.5m subject to a maximum of the value of their benefits on 5 April 2014. There will be no restriction on further contributions and benefit accruals that will be subject to normal tax reliefs, but the lifetime allowance charge will apply to any excess over the personal limit when benefits are crystallised.
As an observation, are these changes simply a means for the Government to redistribute the future cost of pension tax relief to take account of the impact of auto-enrolment? The increasing number of individuals who will contribute to pension arrangements over the next few years are mostly clients who will never be threatened by the proposed annual allowance or lifetime allowance changes.
The opportunities for advice and wider financial planning around these announcements are significant and action sooner rather than later for advisers in identifying those clients who could be impacted should be the call to action.
Adrian Walker is head of retirement planning at Skandia