My salary is £300,000 a year and I am a member of my employer’s money-purchase pension scheme with an employer contribution of 20 per cent. I understand these contributions are over the limit under the new pension rules, so what options do I have?
There is a new annual allowance for this tax year of £50,000, which is a significant reduction from the previous limit. You are able to make pension contributions above this limit but there will be no tax relief available, which means a tax charge where an employer contribution is payable.
You have three main options, depending on the flexibility of your employer and pension scheme.
The first option is to carry on as usual and make no changes. Your total pension contribution for 2011/12 (assuming no pay rises) will be £60,000.
This can continue but you will then be subject to a tax charge on the excess.
Being an additional-rate taxpayer, this will be £10,000 times 50 per cent, which equals £5,000.
You will have to fund the tax charge from elsewhere as it will not be deducted from the pension payments.
The second option is to opt out of your employer’s pension scheme and ask them, if they are agreeable, to pay your employer pension contribution to you as a cash sum for you to invest elsewhere.
You could then invest up to £50,000 of this into your own pension policy and receive full tax relief so that the cash payment from your employer would be tax neutral.
However, you would not be able to reclaim any National Insurance, which you would have paid at 2 per cent on the whole amount (£1,200). Your additional-rate tax relief is not immediate, so you would have the time delay and administration of claiming this back from HM Revenue & Customs.
The third option would be to ask your employer if they would be willing to pay £50,000 of the employer contribution to their pension scheme and pay the excess to you as a cash supplement.
The £10,000 paid as cash would be subject to 50 per cent tax and 2 per cent NI, giving you a net amount of £4,800 to invest elsewhere as you wish.
The advantage of option three over option one, even though it does result in less money in your pension pot, is that you do not need to fund an extra tax charge from elsewhere. The tax on the cash supplement is deducted at source from the payment, as with your basic salary.
The main advantage of option three over option two is that you are not subject to NI on the £50,000 pension contribution, meaning a saving of £1,000.
There are always other factors to consider, such as the overall lifetime allowance and how near or far you are to reaching this, and it is always essential to get full, individual advice that takes account of all the other information but as an outline, option three could give you a good compromise within the new rules. I will also remind you that reviewing your situation regularly remains as important as ever.
Emma Duncan is a director of Thameside Wealth Management