Sleepwalking into pensions mayhem

Your pension is a subject that often gets pushed down the agenda. In the same way that everyone should have a professionally drafted will in place it is also important that your pension arrangements are up to date and relevant for your circumstances.

There are a number of tax advantages in relation to planning for your pension in retirement although you should remember that whilst your pension is important and has significant tax advantages, it is only one aspect of financial planning for your retirement, but getting it wrong could be costly. It is important to take good professional advice and use a financial planner with the right professional and technical qualifications.

A number of changes came into effect in April 2016 with opportunities to take advantage of certain tax reliefs, many of which require action to be taken before 5 April each year. Now would be a good time to review your arrangements with your financial adviser.

The life time allowance

This is the maximum amount or value that your pension policy can be worth without incurring significant additional tax charges. It was reduced from £1.25million to £1million from April 2016. This has now been increased in line with inflation.

If this were to be reduced further in the future it might be possible to apply for protection at the higher amount before the reduced amount comes into effect, but you should take professional advice because in certain circumstances you may not then be able to make further contributions.

You also have to bear in mind that any defined benefit schemes (sometimes called final salary schemes) have a capital value themselves for this purpose so that if your salary increases you may be taken above the lifetime allowance. It can take some while to obtain these details so you should take action in good time.

The annual allowance

This is the amount that any individual can contribute into a pension fund in any tax year subject to having enough taxable income from which it can be deducted.

Currently, this is £40,000 for each individual. This is the gross amount so the net amount payable would be £32,000 and the HMRC make up the difference at the basic rate inside the pension fund.

It is possible to bring forward unused allowances from the last three years so again careful advice must be taken as to the amounts which are available against income. This was available against total income and therefore at the tax payers highest marginal rate.

With effect from 6 April 2016 the higher rate of tax relief has been withdrawn by £1 for every £2 of income above £150,000. This is subject to a minimal remaining allowance of £10,000 for those with relevant income above £210,000.

Your pension fund should also be considered together with a pensions by-pass trust to ensure that any capital payments are, in appropriate circumstances, protected for your family down the generations.

By doing nothing, you may be sleepwalking into a number of potential pitfalls and disadvantages.