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Pension contributions for high earners

Expert Financial Solutions Ltd Chartered Financial Planners and independent financial advisers in Witney, near Oxford, Oxfordshire advise many high earners and high net worth clients on their pension and retirement savings.

Our highly qualified and professional financial planners are pension experts and have the highest level of pension qualifications including G60 advanced financial planning certificate pensions, and AF3 advanced diploma in financial planning pensions.

Overview.

In the Budget 2009 the Government announced its intention to limit the pension tax relief for individuals with income of £150,000 or more with effect from 6th April 2011.

The effect of the April 2011 changes will be to taper the higher rate relief so that those below the earnings threshold are not affected but those earning £180,000 or more will only benefit from tax relief at 20% (the same as a basic rate tax payer). The way in which the tapering will work is still to be decided.

In simple terms all contributions into a registered pension scheme (SIPP, personal pension, employer pension scheme including benefit accrual under a final salary scheme) for a high earner are to be treated as though they are member contributions on which higher rate tax relief would have been available. A tax charge would be levied to offset the notional higher rate relief.

To prevent abuse there are interim measures for those with ‘relevant income’ of £150,000 or more in this tax year as well as the two previous tax years. The interim measures apply from 22nd April 2009 (Budget day) for the two tax years ending 5th April 2010 and 5th April 2011. The purpose of the interim measures is to prevent those affected by the new rules seeking to ‘forestall’ this by increasing pension contributions above their normal pattern of contributions.

There are a number of measures to prevent anti forestalling.

Expert comment.

The legislation actually goes much further into limiting pension tax relief for high income individuals than was expected.

The definition of ‘relevant income’ can be complicated and is beyond the scope of this page, so please contact us if you have questions or require advice.

It is important to put the tax charges into perspective – the changes are designed to reduce the effective rate of tax relief to the basic rate of 20%. It is not designed to wipe out the tax relief altogether.

We do not see these changes as the end of pensions for retirement savings but the changes do mean that expert pension advice is even more essential for those individuals with significant earnings.

If you are a company director you should also look at what options exist for releasing profits from a company in a tax efficient way.

Of course it is possible that all this will be unwound by a future change of Government but it would be unwise to rely on this. In the meantime clients should consider maximising pension savings as far as possible without infringing on the new rules, maximising investment ISA contributions, and then consider collective investment accounts or offshore investment bonds as alternative means of tax planning.

Alternatively consideration could be given to Qualifying Recognised Overseas Pension Schemes (QROPS) which are not subject to the registered pensions scheme tax regime.

The highly qualified and experienced pension advisers of Expert Financial Solutions Ltd offer advice on retirement saving, advice on pension contributions and retirement planning for high earners, advice on contracting out, advice on contracted out personal pensions, advice on retirement planning, advice on personal pensions, advice on stakeholder pensions, advice on ISA savings.

The detail

For information relating to individuals earning £100,000 or more and the loss of personal allowance from 6th April 2010 please refer to our salary sacrifice pages here.

If your income is below £150,000 you may not be affected by the interim measures but should still consider maximising pension contributions to obtain the higher rate tax relief. You could face a number of possible problems in future if your income increases above the limit, or the relevant income limit is reduced, or if higher rate relief on pension contributions is withdrawn altogether. Higher rate relief is a good incentive to make pension contributions today but would look even better with hindsight if it were to be withdrawn.

If your income is in the £150,000 to £169,999 bracket you may be able to reduce relevant income down by making personal contributions to pension plans of up to £20,000. Employer contributions do not reduce relevant income although third party contributions will do so. Anyone paying less than £20,000 personal contribution should consider increasing to £20,000.

If your income is above £169,999 you should consider continuing existing normal regular pension contributions and take advantage of the Protected Pension Input Amounts whilst they are protected and whilst higher rate relief remains available.

Individuals in this income bracket who currently make no contributions or pay less than £20,000 p.a. should make contributions up to this amount to use the Special Annual Allowance and obtain full higher rate tax relief on the contributions.

Special annual allowance.

The special annual allowance provisions potentially apply to any individual who has relevant income of £150,000 or more and who on or after 22nd April 2009 has an adjusted pension input amount of more than the special annual allowance.

The special annual allowance is the higher of: -

1. £20,000 or
2. The lower of
1. £30,000 and
2. The average of total contributions paid 2006/07, 2007/08 and 2008/09 into all money purchase scheme but excluding such contributions paid quarterly or more frequently.

 

Once the starting level of special annual allowance has been calculated it is then reduced by any amounts that qualify as protected pension input amounts subject to a minimum of zero.

Any individual who exceeds the special annual allowance is subject to an income tax charge on the excess; for 2009/10 this is 20%. Although on first inspection 20% is sensible as higher rate relief is 40% when you delve deeper you will find that the tax charge can apply even if no higher rate relief would have been available.

The special annual allowance runs alongside the normal annual allowance charge although there is scope to avoid double charging. If an individual is liable to both charges the special annual allowance is reduced by any amount chargeable under the annual allowance rules.

Although there is no test for the annual allowance in the tax year in which all benefits are taken or the client dies, at present there are no general provisions for the special annual allowance.

Adjusted pension input amount.

This is the amount of contribution that has been paid over and above normal pension savings. When this amount exceeds the special annual allowance a tax charge is triggered.

Expert Financial Solutions Ltd pension advisers will work this out for you and can advise you if you are affected.

Protected pension input amount.

The rules are intended to apply only to individual who increase pension contributions before 6th April 2011 in excess of normal regular pension savings. A protected pension input amount has been introduced to capture such normal regular pension savings. 

For money purchase pension plans including SIPPs and personal pensions it is summarised as there has been no increase in contributions other than on a basis agreed prior to 22nd April 2009 where contributions have been paid continuously on at least a quarterly or more regular basis from a date before 22nd April 2009.          

This means that annual contributions, regular single contributions and one off single contributions cannot be protected pension input amounts. It also means that quarterly or more frequent contributions can be protected regardless of the amount involved.

September 2009.