Planning for your retirement

The gap between the amount of money that people are saving and the amount they need to ensure a comfortable retirement is a perennial problem. It is important to act now to help maximise your income in retirement, including making the most of the available tax breaks.

Investing in a pension scheme, whether a company or a personal scheme, allows you to enjoy tax breaks on your pension savings. There are tax reliefs as you invest and a tax-free regime for your savings. Your employer may also be able to contribute and obtain tax relief.

Scheme managers can provide pension forecasts to help you judge whether you are saving enough, and what additional savings you might have to make in order to generate the income you will need in retirement.

For pension contributions to be applied against 2010/11 income they must be paid by 5 April 2011. Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but subject also to the annual allowance, and special annual allowance for those with annual income over £130,000 (see below).

The anti-forestalling rules

In the 2009 Budget, the Labour Government announced its intention to restrict tax relief on pension savings with effect from 6 April 2011 for people with taxable income of £150,000 or more. The relief would be tapered down until it reached the basic rate of 20%.

Anti-forestalling legislation was introduced for 2009/10 and 2010/11 to prevent those potentially affected from seeking to circumvent this change by increasing their pension savings (or their employer’s contributions) in excess of their normal regular pattern, prior to the restriction taking effect.

Due to changes in the 2009 Pre-Budget Report, there are effectively two slightly different sets of rules. Those rules are complex, but key provisions are:

• Regular premiums, paid at weekly or monthly intervals, continue to qualify for tax relief at up to 50% so long as they remain at the same level as they did at 22 April 2009 (earnings of £150,000 or more) or 9 December 2009 (earnings between £130,000 and £149,999)
• Irregular premiums may qualify but are subject to the special annual allowance, which is a figure of between £20,000 and £30,000, and reduced by the amount of regular premiums paid in the year.

Contact us to discuss your own position as the special annual allowance depends on a number of factors.

As previously stated, in some cases pension premiums may attract an effective 60% tax relief. Otherwise relief will be at the appropriate rate – 20%, 40% or 50%, with 20% at source and the balance through self-assessment.

If the special annual allowance is exceeded, the current rules effectively limit tax relief on the excess to 20%. Employer contributions in excess of the allowance will attract a tax charge on the employee of 30% or 20% as appropriate.

The Coalition Government acted quickly to cancel the previous Government’s proposals for pensions tax relief from April 2011. Instead, legislation has been announced to reduce the annual allowance (the effective cap on pension premiums) to £50,000 a year and to reduce the lifetime allowance to £1.5 million.

We can help you with all aspects of financial planning, including a discussion of your spending needs, post-retirement. Please call us for further advice and assistance.