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The ‘ultra-processed’ pension regime

As part of our series of articles with the PKF Francis Clark Private Client team, we are using a food theme to bring together all of the different ingredients needed to provide expert financial advice. 

Yet more changes to the ‘ultra-processed’ pension regime are underway, after just 17-years of Pension Simplification designed around a good old-fashioned simple diet for healthier financial lives.

Pension regime labelling is now as confusing to read as ever, even for the most financially astute. And it’s becoming even more convoluted, with continual changes to lifetime and annual allowances as well as the treatment of death benefits for loved ones.

Fat-free Lifetime Allowance?

One area of pensions making headlines is the planned abolishment of the lifetime allowance in 2024. With a fat content first introduced at £1.5million in 2006 and peaking in 2010/11 at £1.8million, the government has been on a fat reduction diet ever since – with the Lifetime Allowance now 40% lower, at under £1.1million.

Introduced in 2006 to test overall pension benefits and applying a tax charge on any excess at certain life events, government reductions and five forms of reduction protection schemes later, ‘to protect our NHS’ a surprise announcement came that the excess charge will no longer apply and that from April 2024 we will be fully fat-free with the allowance being abolished.

A welcome relief for those looking to grow their pension benefits, both for themselves and future generations? There’s a catch – Labour immediately responded by suggesting this would be reversed  if in power from 2024/25.

There also remains a frozen limit on an individual’s tax-free pension commencement lump sum, at 25% of total pension assets, up to a maximum of £268,275, or potentially higher if qualifying for one of the protections.

Energy-boosted Annual Allowances

Now standing at a feeble 25% of the towering £255,000 annual allowance of 2010/11, the 50% increase to the 2022/23 annual allowance means tax relief might now apply to payments of up to £60,000 each tax year, typically subject to earnings.

High earners, who have been penalised by a complex tapered annual allowance rule, will welcome a further relaxation ‘to protect the NHS’. Tapering now starts once total earnings exceed £260,000 – a relief for many, yet a perennial sting in the tail for some additional rate taxpayers – making pension savings less attractive.

The tapered annual allowance has previously seen many opt out of their occupational pension and negotiate alternative remuneration rather than pay a tax charge. However, research shows it may have been in their best interests to pay the tax charge to reap long-term pension benefits which are unlikely to be replicated through other savings options.

High earners need to take care, as the annual allowance applies to all gross pension contributions, both personal and company, into a defined contribution scheme. For a defined benefit pension arrangement, it is the increase in the value of your benefits over the tax year. Your financial planner can help calculate this.

If pension benefits are triggered, the saver might be subject to a Money Purchase Annual Allowance (MPAA) which has been boosted by a whopping 150% to £10,000. The objective for the MPAA is to stop tax relief being claimed twice via recycling pension contributions. However, it can be an unpleasant surprise for those who have taken advantage of pension flexibilities whilst continuing to contribute to their pension.

Calorie-free carry forward

The most significant space for planning for those who have taken a step back from pensions, for fear of breaching allowances, might now be the ability to carry forward unused annual allowances. As HMRC has relaxed rules on existing protections, this could provide opportunities for additional pension savings.

Assuming you have maximised contributions in the current tax year, and meet the qualifying criteria, you might be able to carry forward unused annual allowances from the previous three tax years. And if you are subject to tapering in those years, you will still be able to carry forward any unused tapered annual allowances.

Less on the plate for loved-ones

Since April 2015 radical pension freedoms have liberated pension death benefits that can be left for loved ones; however, new measures being proposed might start to lock death benefits up again. They include income tax being applied to beneficiaries drawing income on their entire inherited pension, where someone dies before as well as after age 75. This could reduce the appeal of passing pension death benefits by as much as 45%.

Minimal processing for healthier financial lives

Pension saving remains a cornerstone of wealth planning and continues to present opportunities for tax efficiency. The 2006 Pension Simplification was a landmark moment for getting back to a good old-fashioned pension diet of natural minimally processed food with straightforward labelling. If we are all to develop healthier financial lives, we need another radical overhaul.

In the meantime, if you think you might be affected by any of the allowances in this article or would like to discuss your pension planning in more detail, please contact your usual Francis Clark adviser, who will be happy to help or email [email protected].

Aimee Raymond
Featuring: Aimee Raymond
Aimee started working in financial services in 2008 and qualified as a Financial Planner in 2013. Since then, she has been advising clients on all… read more
Lyndon Massey
Featuring: Lyndon Massey
Lyndon started his career in banking and started focusing on financial planning in 1999. He gained experience looking after corporate and trustee pensions before moving… read more

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