Crucial changes are about to come into effect in April that could have a huge impact on your retirement pay-out
Martin Stewart is managing director of London Money
Addressing your personal finances is precisely the sort of methodical, slightly dull, but immensely satisfying activity that January – with all its promise of a better year, tinged with bitter post-binge regret – is perfect for. Like organising your stationery drawer when you get back to the office or writing out that “healthy eating” plan for the new year. The big difference is that the changes you make to your finances now are likely to last beyond the 31st, and will have a much greater impact on your future.
So while we’re not about to tell you that you should act now – you should always seek financial advice as everyone’s situation is unique – we will say that this month presents a perfect opportunity to take a long hard look at your pension scheme and make some important decisions. Crucial changes are about to come into effect in April that could have a huge impact on your retirement pay-out – particularly if you’re a high earner who has accumulated a sizeable pension pot.
Lifetime allowance (LTA)
In his latest budget, George Osborne announced that lifetime allowance for pensions will be cut from £1.25m to £1m as of April this year.
The good news is that those with an existing fund value of over £1m – or even slightly under the million mark – will have the option to take out fixed protection at £1.25m, thus avoiding higher rate tax of 55% on the balance over the LTA. The trade-off for fixing at the higher £1.25m level is that once fixed protection is in place, no more payments can be made into the scheme, or any other pension schemes.
If, for instance, a fund currently stands at £900,000, it might still be worth considering fixed protection if that amount is likely to grow more than £100,000 between now and retirement. Or it might not. It all depends on personal circumstances and what other options are available to you. A financial adviser will be able to guide you through these options and help you to make the right choice for you and your money.
For those of you with final salary or defined benefit plans, don’t assume that you’re nowhere near the threshold. An annual pension income of £50,000 or more at retirement could easily take the capital value of your pension over £1m, so it may be better to ask the right questions now rather than pay money into scheme that could subsequently incur higher rate tax.
Annual Allowance is also set to change in April – dramatically. Currently a tidy £40,000 tax free annual allowance will be slashed to just £10,000 for the tax year 2016/17. Considering the changes to the Lifetime Allowance, now could be a more lucrative time to deposit money into a pension and take out fixed protection.
In both instances, it might be tempting to ask your employer to cancel pension payments to avoid higher rate tax, particularly if you have a way to go until retirement and already have a considerable amount in the pot (lucky you). Make sure you’re not throwing the baby out with the bathwater; in the vast majority of cases, those pension payments are an addition to your salary and it may not be possible to exchange these for, say, a bonus or a pay rise. Find out whether you will be better off continuing with payments into your pension and paying higher rate tax. After all, half of something is better than all of nothing.
In short, there’s only one course of action that we absolutely, 100% advise to anyone with a pension, regardless of your circumstances. Book an appointment with a financial adviser. Find out as much as you can – they are there to help you, and don’t leave it too late to act on their valuable advice.
Martin Stewart is managing director of London Money. Martin has worked in Financial Services for the past 22 years and in that time has gained a wealth of knowledge and experience. Martin believes that financial planning should follow the London Money mantra of being simple and smart and he takes that approach with his clients regardless of their position. Follow them on Twitter.
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