Tax year end planning: Pensions

There are important year end deadlines for pensions looming into view

On 6 April 2014, two major changes will take effect to pension allowances:

1.  The Annual Allowance (AA), which effectively sets the maximum tax efficient pension contribution from all sources during a tax year, will be cut from £50,000 to £40,000.  This is the second cut to the AA, which was £255,000 in 2010/11.

2.  The Lifetime Allowance (LTA), which effectively sets the maximum tax efficient total value of pension benefits, will be cut from £1.5m to £1.25m.  This is also a second cut – the LTA was £1.8m in 2011/12.

The AA cut is a reminder of the importance now of taking full advantage of each year’s AA.  When the allowance was £200,000 +, regular contribution was a much less important factor.  Fortunately, if you have not used the full AA in any of the three previous tax years, there is scope to do so using special “carry forward” provisions.  5 April (a Saturday) is the final day for carrying forward any unused AA from 2010/11.

As far as the LTA reduction is concerned, the government has announced two transitional protection options for those who are, or might in the future, be affected.  One of these options, Fixed Protection 2014 (FP2014), will only be available to claim until 5 April 2014, while the other, which has more limited scope, will not be finalised until summer.  Very broadly speaking, FP2014 will preserve your LTA at a minimum of £1.5m, provided that from 2014/15 onwards, no more contribution to your pensions are made and you accrue no further benefits.

If carry forward and/or the new transitional protection could be relevant to you, you should seek expert advice as soon as possible.  Both are aspects of pensions which may involve considerable research before a decision can be taken.

The value of your investment can go down as well as up and you may not get back the full amount you invested.  Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.  The value of tax reliefs depends on individual circumstances.  Tax laws can change.  The Financial Conduct Authority does not regulate tax advice.

6th March 2014