Top earners should maximise pension contributions

The lifetime allowance will be indexed annually in line with the consumer prices index (CPI) from 6 April 2018.

Transitional protection, similar to fixed protection and individual protection 2014, will be introduced alongside this reduction to ensure the change is not retrospective, Alan Wilson, principal partner of St James’s Place Wealth Management, points out.

As expected, the chancellor confirmed a reduction in the annual allowance for high earners.

The annual allowance is tapered by £1 for every £2 of income greater than £150,000 to a minimum annual allowance of £10,000 from April 2016.

Gavin Moffatt, associate of independent pension advisers City Noble, says cutting the annual allowance to £10,000 for high earners is a clear signal that the government believes tax relief is not targeted at the right recipients.

“Changes to pension tax relief have been on the cards since the start of auto-enrolment.

“But before the industry starts keening its lament over the imminent and inevitable demise of tax relief, it should remember the social purposes for which it was given in the first place.”

Nick Gartland, senior financial planning director at Investec Wealth and Investment, says the tapering away of tax relief to a minimum £10,000 a year means that pensions are playing an increasingly marginal role in retirement planning for higher earners.

Mr Gartland says: “Those looking to maintain a similar standard of living post retirement will need to look beyond their pension to a much broader range of tax-efficient savings vehicles.”

The Finance Bill has also stated individuals who were hoping to get around the annual allowance taper cannot enter into a salary sacrifice or flexible remuneration arrangement on or after 9 July 2015 in order to reduce their threshold income.

For those who did opt for salary sacrifice in a bid to maximise their pension, they will now find the amount of income given up is simply added back to their individual threshold income.

Neil Jones, technical manager at Canada Life, says in terms of tax rewards the exchequer will bank a £1.5bn profit by raking in £4.1bn from cutting pension tax relief.

He points out the money will start coming in straightway from the restrictions to pensions tax relief, while the government won’t have to start paying for the inheritance tax changes it made until 2017.

Mr Jones says it is vital those earning more than £150,000 should seek advice on what the most tax-efficient capital growth options now are and he expects offshore bonds to prove popular.

One course of action that could be taken, according to Peter McDonald, pensions partner at PwC, is senior employees may now not bother saving into pensions.

He says: “Auto-enrolment is about engaging the shop floor and lower earners in pensions, but by disengaging bosses it feels that people are no longer all in this together.

“This creates a level of uncertainty and complexity for people earning around £120,000 or more a year, and could see a rush of these people coming out of salary sacrifice arrangements as they won’t know if they have breached the tax limit until the end of the tax year.

“We would encourage employers to undertake a review of their pensions salary sacrifice to understand who will be impacted by this dramatic change.”

Mr Wilson says another course of action for high earners is to maximise their pension contributions in the current tax year before the limits change.

As well as the changes to the allowance, he says advisers should also note legislation will be introduced to align pension input periods with the tax year.

There will transitional rules to protect individuals who might otherwise be affected by the alignment of their pension input periods.

From 2016 to 2017 the government will also reduce the 45 per cent tax rate that applies on lump sums paid from the pension of someone who dies aged 75 plus, to the marginal tax rate of the recipient.

The 45 per cent tax rate will continue to apply to lump sum death benefits paid to trusts.

The Budget also confirmed the income tax personal allowance will increase to £11,000 from April 2016 and the government committed to future increases to meet its manifesto pledge of attaining a personal allowance of £12,500.

Subsequent increases will be linked to increases in the national minimum wage.

The threshold for higher rate tax will increase to £43,000 from April 2016, with a further manifesto pledge to raise this to £50,000.

The chancellor also announced a reduction in the rate of corporation tax to 19 per cent from 1 April 2017, reducing to 18 per cent by 2020.