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Staying on side – pension penalties for high earners

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Steve Moy (pictured), wealth management consultant at St. James’s Place, comments on the pension penalties high earners need to be aware of from April 2016…

From April the amount that can be contributed to a pension each year will be gradually reduced when income exceeds GBP150,000. High earners in the private and public sectors which include managers, GPs, civil servants, academics, long-serving teachers and senior police officers are all at risk at being caught out by this complicated new ruling.

The annual allowance is currently GBP40,000 for most high-earning individuals, but from 6 April 2016, this figure will be whittled away by GBP1 for every GBP2 of income over GBP150,000. Those earning over GBP210,000 will not be able to put more than GBP10,000 into a pension.

To add more twists to an already tangled scenario, what will be tested against the annual allowance is ‘adjusted income’, which isn’t as simple as just ‘salary’. Adjusted income includes the value of employer pension contributions as well as income from sources unrelated to employment, such as savings and property. It is estimated that those with salaries of GBP90,000 or more could be affected.

For anyone contributing to a defined contribution pension themselves, your total contributions should always stay within your allowance.

Anyone who benefits from an employer contribution has a potentially more challenging scenario. If your overall pension contributions are greater than that permitted by the taper, then a discussion with your employer is needed. You need to decide whether to stop contributions or be remunerated in a different way, for example a bigger salary in lieu of employer contributions.

Members of a final salary scheme have arguably the greatest challenge of all. Most members don’t know how much their ‘pension input amount’ is for the year. A factor of 16 is applied to the promised pension at the start of the year. Once adjusted for inflation, the figure is subtracted from the equivalent closing value 12 months later. This can then be used to compare against the individual’s annual allowance.

It’s tremendously complicated, so I don’t recommend anyone makes a decision without getting advice first. Any unused allowance from the previous three years could counter any breach, but eventually an individual may run out of unused allowance, thereby triggering a tax charge of 40 per cent for overpayment.

Anyone with a money purchase or final salary pension who earns close to, or over, GBP100,000 a year should seek advice before April to determine how much can be put away in a pension tax-efficiently. If the annual allowance taper is an issue, then there could be other tax-efficient ways to save for retirement.

However, a limited opportunity exists for high earners to maximise their GBP40,000 annual allowance before the end of the 2015/16 tax year by carrying forward any unused annual allowance from 2012/13

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