02 Feb 2015
Niall Sharry, Corporate Benefits Consultant, looks at the benefits of paying into a pension before April 2015.
The clock is ticking with only months to go until the new pension freedoms become reality. With the legislation in place, it’s important that in the run up to April you start to plan in earnest to make sure that you make the most of your pension savings before the end of the tax year.
The new flexibility will mean clients over 55 have the same access to their defined contribution/money purchase pension savings as they do with any other investments. With the combination of tax relief and tax free cash, clients at or over this age should consider maximising their pension contributions ahead of saving through other investments.
Anyone accessing the new flexibility from the 6th April will find their annual allowance reduced to £10,000. You may therefore wish to consider boosting your fund before April and take advantage of the current £40,000 allowance.
The new death benefit rules will make pensions an extremely tax efficient way of passing on wealth to family members. Clients may want to consider moving savings which would otherwise be subject to IHT into their pension to shelter funds from IHT and benefit from tax free investment returns.
Pension contributions reduce an individual’s taxable income. So they are a great way to reinstate the personal allowance. For a higher rate tax payer with taxable income of between £100,000 and £120,000, an individual contribution that reduces taxable income to £100,000 would achieve an effective rate of tax relief at 60%.
An individual pension contribution can also ensure that the value of child benefit is saved. Child benefit is cancelled out by a tax charge if the taxable income of the highest earner exceeds £60,000. There is no tax charge if the highest earner has income of £50,000 or less. As a pension contribution reduces income for this purpose, the tax charge can be avoided. Sacrificing a bonus for an employer pension contribution could be an alternative method of funding a pension contribution which would reduce a client’s taxable income and potentially recover their personal allowance or avoid the child benefit tax charge.
These are just some of the reasons why a client may wish to boost their pension pots before the tax year end. Take advantage if it’s right for you.