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Annual and Lifetime Allowances
You can now contribute as much as you like into any number of pension schemes (personal and/or company) each year, and there is no upper limit to the total amount of pension saving you can build up
Annual Allowance
Each year you can receive tax relief on your pension contributions up to the higher of £3,600 or 100 per cent of your earnings (salary and other earned income) subject to an annual allowance above which tax will be charged.
Annual contributions above the annual allowance will be taxable at 40 per cent, whether made by you and/or your employer.
The annual allowance for the tax year starting 6 April 2009 will be £245,000 and will rise each year until it reaches £255,000 in 2010. The allowance will be frozen at this level until the tax year starting 6 April 2015.
If the annual allowance is exceeded you'll need to declare the extra pension savings and pay the annual allowance charge through Self-Assessment.
The annual allowance charge will not apply in the year you take all your benefits.
It is also possible to make contributions on behalf of third parties, (such contributions are treated as having come from the member for purposes of tax relief). This offers scope for people to fund their spouses and dependants pensions, if they so wish.
For pensions provided on a Defined Benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to asses your position re the Annual Allowance.
Lifetime Allowance
There is now a lifetime allowance against which the total value of the benefits built up in your pension fund/s by you and/or your employer (including investment growth) will be tested.
The value of any pension’s savings above the lifetime allowance will be subject to a lifetime allowance charge; this will apply in addition to the usual Income Tax due on pension payments
The lifetime allowance for the tax year starting 6 April 2009 will be £1.75million and will rise each year until it reaches £1.8 million in 2010. The allowance will be frozen at this level until the tax year starting 6 April 2015.
If you take benefits above your lifetime allowance as a pension, the lifetime allowance charge on the excess amount will be 25%.
If you take benefits above your lifetime allowance as a lump sum, the lifetime allowance charge on the excess amount will be 55%.
The lifetime allowance 'test' will take place when you start drawing your benefits or when you reach age 75 (in this case tax would be payable as if you were drawing an income from the pension; you can't take a lump sum once you reach age 75).
If your pension is close to, or above, the initial lifetime allowance figure it's important to seek specialist advice about how you might protect your pension from the lifetime allowance charge. Protection can be obtained up to 5 April 2009.
If you wish to discuss the above further or require information on any of our services, then please contact us.
Any reference to legislation and tax is based on The Financial Planning Partnership's understanding of UK law and HM Revenue & Customs practice. These may be subject to change in the future. Tax rates and reliefs will also change and their value to you will depend on your individual circumstances. No guarantees are given regarding the effectiveness of any of the above strategies.