Pension changes: Check the advice you are getting!
If you are aged 55 or over and if, since 5 April 2015, you have taken as little as £1 from your pension for the first time, you may have lost a significant amount of tax relief on your pension contributions for the rest of your life. You can read more about this below.
Hidden amongst the latest batch of reforms to pensions, most of which took effect as from 5 April 2015, are some easy to miss dangers for individuals who use ‘money purchase’ pension shares to save for their retirement.
As with most radical reforms to regulations there will be a number of unintended consequences, one of which being the potential loss to the Exchequer of revenue from National Insurance, due to individuals aged 55 or over electing to be ‘paid’ indirectly via their pension fund, rather than by their employer/company.
To combat this and other risks to the Exchequer’s income, the Government has introduced a number of so called ‘trigger events’. One of the most significant of these events, should it occur, has a huge impact on the tax free amount that an individual can pay into (or have their employer/company pay into) a pension each tax year, known as their Annual Allowance.
An individual therefore who, having reached the age of 55, decides to take as little as £1 of income from a pension scheme after 5 April 2015, will not only see their Annual Allowance reduce from £40,000 per annum to £10,000 per annum (forever), but will also lose the option to carry forward any unused (pension contribution) relief that they may have available to them, for the preceding three tax years.
For an individual who was intending to maximise their pension contributions say for another 10 years, this could cost them up to £193,500 in lost tax relief where the individual is a 45% taxpayer and making personal pension contributions, or corporation tax relief of up to £86,000 if contributions are being paid by the individual’s business.
One of the biggest risks is where individuals receive communications about options for liquidating small pension funds directly from insurance companies and fail to seek specialist advice before responding to these, especially given that decisions to take benefits from a pension policy cannot be reversed.
The detail contained in these new reforms will inevitably be overlooked by many individuals and some of their professional advisers, in particular by their accountants and by financial advisers who do not deal exclusively with pension work. It is likely that many individuals will inadvertently and most likely unintentionally ‘pull the trigger’ following advice from their IFA or accountant.
We can help! If you believe you may have received incorrect advice from your IFA or accountant about your pension, please contact Lucy Mills on 0117 906 9460. If you require specialist pension advice contact GL Integrity Financial Planning on 0117 906 9489 and ask for Andrew Stinchcomb.