View more on these topics

Know your limit

As the dust settles on the bombshell Budget pension changes, what should advisers do now? The detail of the changes has thrown up some areas where clients will need urgent advice.

One such topic is the income threshold and avoiding going over it. The Budget highlighted that the figure for the relevant income limit is £150,000. This figure includes investment income such as dividends from shares and interest from bank deposits as well as earnings.

What was less well trailed is that personal (but not employer) pension contributions of up to £20,000 and gift aid donations are deductible in this calculation. For example, James has earnings of £155,000, bank interest of £5,000 and share dividends of £7,000. On the face of it, he is over the limit. But by paying a pension contribution of £17,000 or more, his relevant income is below £150,000 and he is not affected by the changes.

This may be useful for current and future planning but unfortunately it is not possible to go back and pay a personal contribution in 2007/08 and 2008/09. (The client is affected if relevant income is greater than £150,000 in the current or previous two tax year.) Anyone paying in more than £20,000 a year on a quarterly or more frequent basis can continue to pay in and get full tax relief but HMRC says the regular contribution is the lowest one in the last 12 months.

For example, if Peter paid in £5,500, £7,500, £7,500 and £7,500 quarterly during the 2008/09 tax year, the amount protected for 2009/10 and 2010/11 is £5,500 a quarter. Peter would appear to have increased his contribution in the second quarter of the 2008 tax year but continuing to pay £7,500 a quarter in 2009/10 means that he will only get 20 per cent tax relief on £2,000 of each payment.

Some flexible benefit arrangements might also be under threat. Many flexible benefit schemes use salary sacrifice for pension contributions and other benefits. In some flex schemes, the sacrifice is subject to one-year rolling contracts. While salary sacrifices set up before April 22, 2009 are not added to relevant income, the next annual renewal of some flex schemes could give rise to a post-April 22 salary sacrifice arrangement. This could tip some people over the £150,000 limit.

For those lucky enough to have relevant income of less than £150,000 in the current and previous two tax years, no special rules apply. They can personally pay up to 100 per cent of earnings and, together with their employer, up to the annual allowance of £245,000 (for ther tax year 2009/10) on a tax-advantaged basis.

As we know from exper-ience, pension rules are a movable feast. Those that can afford to maximise contributions and get full tax relief should do so now before there is time for another Budget, pre-Budget or special announcement.

John Lawson is head of pensions policy at Standard Life

Recommended

Positive feedback

There is an ongoing misconception that the consumer media are less supportive of IFAs than they might be. In fact, it is fair to say that IFAs enjoy unrivaled support in the consumer personal finance arena. A quick look at Unbiased.co.uk’s Blue Book goes some way to underline just how supportive both groups are for each other.

Hargreaves adds Wintle to Wealth 150

Hargreaves Lansdown has added the Neptune US Opportunities fund, managed by Felix Wintle, to its Wealth 150 list of recommended funds.Stuart Goodwin, an analyst at Hargreaves Lansdown, says Wintle has impressed them with his economic and sector views. Over three years to May 19, according to Financial Express, the £135m fund is comfortably number one […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment