Question: Pension investment and tax benefits.
There’s been a lot in the press over the last few months about pensions and their tax benefits - what are the tax benefits and how much can I invest in a pension?
Mark, Woodford Green.
Answer:
Until recently tax relief was available on all contributions to approved pension schemes, within certain generous limits. In simple terms the government would give back the Income Tax (but not National Insurance Contributions) paid on income invested in a pension. On 14th October the government announced that from 6th April 2011 the maximum annual contribution to a pension, with tax relief, would reduce from £255,000 to £50,000. Amounts contributed above this level will be subject to a special tax charge that will negate the effect of the tax relief.
Tax relief might still be available for individuals exceeding the £50,000 limit if their pension contributions were less than £50,000 in each of the previous three years.
The limit for total pension savings will also reduce from £1.8m to £1.5m on 6th April 2011. Special arrangements exist for those who have already exceeded the new £1.5m limit.
The previous government had announced measures to restrict tax relief on the pension contributions of anyone earning more than £150,000 per year, from 6th April 2011. While the new government has abandoned these plans, the transitional rules announced for the 2009/10 and 2010/11 tax years may affect anyone earning more than £130,000, or making pension contributions in excess of £20,000 per year, restricting the level of tax relief available.
Although the various recent measures restrict the tax relief available on pension contributions, these largely affect those making very large contributions on a regular basis – for most people pensions still represent a very tax efficient means of saving for retirement.
While we have attempted to provide an overview of recent developments, pension planning is a complex area and you should seek professional advice tailored to your personal circumstances.
