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Pension changes could see increased tax bills for CEOs and high-net-worth individuals
Senior executives in the Solent region may have been focused on introducing the new workplace pension scheme of late, but now is the time to focus on their own retirement funds, says Grant Thornton UK LLP
The amount of money that can be saved in pensions each year is due to fall and Grant Thornton in Southampton says this could have a big impact on tax bills for high-net-worth individuals unless they are prepared.
New legislation from April 2014 will greatly decrease the amount that anyone can save in pensions tax-efficiently.
The new legislation will see the lifetime allowance drop from £1.5 million to £1.25m. Taking benefits above this cap will trigger tax bills of up to 55% of the excess, unless action is taken. In addition, the allowance that can be paid into pensions each year will drop from the current £50,000 to a lower level of £40,000 and this currently attracts income tax relief at 45% for those with sufficient income.
Charles Cavendish, manager at Grant Thornton in Southampton, says now is the time for people to take specialist advice to make the most of their pensions, before the new legislation comes into effect in 2014.
He said: “Over the past few years, the allowance that could be accumulated in pensions has been eroded from £1.8m to £1.5m. For those who have not protected their pensions at a higher level, we have until the end of the current tax year to protect pensions at £1.5m before it reduces still further. It would be prudent for savers to consider whether to take advantage before the opportunity disappears. Most importantly, they need to seek advice before the changes come into effect.“
Fixed Protection 2014 allows savers to keep a lifetime allowance of £1.5m. In return, savers agree to ensure that contributions are not made into any pensions, including auto-enrolment and final salary schemes. The application form must be received by HMRC before the end of the current tax year.
For those savers who wish to continue to contribute, Individual Protection 2014 will be available in the 2014/15 tax year, as long as the accumulated pension benefits exceed £1.25m at the valuation point on April 6, 2014. Subject
to the final legislation, savers will have their own lifetime allowance of between £1.25m and £1.5m. Pension holders will be able to apply for both types of protection.
Savers who already have significant pensions benefits may wish to maximise their contributions this year, before protecting their lifetime allowance.
As well as protecting their pensions, there are other steps savers can take to make the most of their pensions, Grant Thornton says.
While pension contributions are now very attractive for those who earn above £150,000, a quirk in the current income tax legislation makes them even more attractive to those with taxable income of between £100,000 and £116,210. Those who earn at this level lose the right to a personal income tax allowance (£8,105 in 2012/13) at the rate of £1 per £2 of income above £100,000, losing it altogether once taxable income reaches £116,210. By making a pension contribution which reduces income below £100,000, they would receive the right to the personal allowance and achieve effective tax relief at a rate of 60% on that portion of the pension contribution. Individuals with income over £100,000 per annum should consider making use of these tax reliefs while they are still available. A failure to do so could result in a missed tax saving opportunity.
In addition to the upfront income tax reliefs, investors should also consider the inheritance tax attractions of holding wealth within an unvested pension fund, the tax efficient growth of assets which can be achieved by the fund and improved options for access in the form of the income drawdown (providing options to achieve greater access to those benefits held within pensions, for those who meet certain criteria after age 55). There are very clear benefits to making full use of pensions, as part of an individual’s overall financial planning.
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – DECEMBER 13/JANUARY 14
Grant Thornton works with high-net- worth individuals to advise on tax and financial planning matters, including pensions. Its expert team believes in a personal service that is tailored to each client’s individual situation, aspirations and needs.
Details: Charles Cavendish 023-8038-1135
www.grant-thornton.co.uk
www.businessmag.co.uk
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