Losing Part of My Pension Annual Allowance



Posted on: 9th October 2015

As of April next year, many of the United Kingdom’s highest earners will be hit with a significant cut to exactly how much they are permitted by the government to pay into their pension pots annually, while still qualifying for tax relief. Chancellor George Osborne made the announcement at the budget earlier this year, coinciding with the confirmation of plans to gradually increase inheritance tax allowance upper-limits to £1 million per couple by the year 2020.

For those with an annual income that falls at somewhere between £150,000 and £210,000 per year, the current annual allowance of £40,000 will gradually be reduced to a much lower £10,000. The alteration to the pensions contribution system follows the announcement made last year that lifetime allowance would also be significantly reduced as of the 2016 to 2017 tax year. As of then, the maximum contributions any individual will be able to make to their own pension pot while still being eligible for tax relief will be brought down to £1,000,000 from the current £1.25 million limit.

The purpose of the introduction of the new system is, according to the Tories, something of an incentive to encourage individuals and couples alike to put more money away for their own retirement. As it stands, those who earn the most end up with the sweetest deal tax-wise while those earning less and unable to contribute quite as much find themselves receiving fewer handouts and benefits from the government.

What Do All the Changes Mean?

Of course the question of importance is that of exactly how the changes in pension tax relief will help the average saver on the street. Well, as far as advocates of the change are concerned, the result will be exactly as intended – a scenario wherein the only savers affected are the wealthiest. Critics on the other hand have a very different take on things as while they don’t agree in principle with the idea of higher earners being offered lower tax incentives, they also believe it to be counterproductive that putting an upper-cap – and a lower upper- cap at that – on how much anyone can save for their pension does little in terms of motivation with regard to putting solid pensions together.

The upper-limit of £40,000 annually may come across as a rather excessive sum the likes of which most people wouldn’t be able to come close to contributing to their pensions on an annual basis anyway. Nevertheless, critics argue that the new rules we’ll also hit those who come into substantial amounts of money at specific junctures for other reasons – property sales, payouts following redundancy or inheritance, for example. And in addition to this, critics also argue that should these kinds of cuts continue – or at least be frozen – a fact that wage inflation will inevitably continue going forward means that those among middle-earning brackets we’ll be hit along with higher earners.

Suffice to say therefore, now is the time for those affected by the government’s changes in pension policy to speak to independent financial advisers and find out both where they stand and the options available to them.