Use it or lose it: changes to the annual pension allowance
Don’t wait, use your family’s annual pension allowance to limit the impact of the drop in pension lifetime allowance limits.
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The amount you can put into your pension and still claim tax relief is falling from £50,000 a year to £40,000 a year from 6 April 2014, but you can still benefit from a higher annual pension allowance with some careful tax planning.
“There is a widely-held belief that the most you can put into your spouse or civil partner’s pension pot is just £3,600 – a belief that came out of the stakeholder pension rules which were introduced in 2001”
Around 140,000 people are expected to be affected by this reduction in the annual pension allowance and while any unused allowance can be carried forward for up to three years, that is little comfort to anyone who is regularly using their entire allowance to maximise their pension savings. They have seen the amount they can claim tax relief on reduce from £255,000 in 2011 to £50,000 and then to £40,000 from 6 April this year.
But by using the pension scheme rules to their advantage, not all of this tax relief needs to be lost.
What you can do
There is a widely-held belief that the most you can put into your spouse or civil partner’s pension pot is just £3,600 – a belief that came out of the stakeholder pension rules which were introduced in 2001. At that stage, for the first time, you were able to pay money into a pension for a non-taxpayer, such as a partner or child, and get basic-rate tax relief up to the £3,600 limit.
But this limit no longer applies and instead you are now able to make up the difference between a partner’s current payments and the annual pension allowance cap.
How it works
Consider your annual pension allowance as a combined amount across your family. So let’s say from 6 April this year, you and your spouse will have a combined annual allowance of £80,000 on which you can reclaim tax relief.
The best news is that you can apply this method across more than just the pension funds of your spouse or civil partner, you can also fund pensions for a cohabitant, partner or even your children and grandchildren.
So if they are putting significantly less into their pension pot, say £5,000 a year, you can top that up with an additional £35,000 which will also receive tax relief. Remember though, that this overall allowance includes all contributions, including those from an employer if relevant.
Don’t forget to reclaim higher-rate relief
If you are entitled to higher-rate tax relief, then remember that you may need to reclaim this yourself as part of your self-assessment for your own contributions, and this will apply to the person you are making the contributions for if they are a higher rate taxpayer.
For example, if your spouse is a higher-rate taxpayer and you put, say, £20,000 into his or her pension fund and you are a 20 per cent taxpayer, they are entitled to claim the additional tax relief up to 40 per cent or 45 per cent – whichever is their highest marginal rate – on that contribution through their own tax return.
This can significantly increase the benefits of making these contributions and create a more comfortable retirement for you and your family.
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About the author
Alan Smith is the CEO of Capital Asset Management. His specialisms include: wealth management, strategic financial planning and creative tax planning.
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