This article is intended to be a brief outline of some of the changes to pension rules that were announced in the UK's March 2020 Budget.
It is not intended to be financial advice specific to your particular circumstances.

Written by Scott Tindle, CFA
​March 12, 2020

New Pension Rules for Higher Earners

Exciting stuff!! Yesterday’s Budget contained a change to the rules concerning pension contributions that will have a significant impact on those earning more than £150,000 per year. I have summarised the changes as succinctly as possible below. Brevity has taken priority over detail; there is a link at the bottom of this section to a more in-depth and technical explanation if you’re interested.

Existing rule (in force until the of the current tax year on April 5, 2020):
The standard amount that you can put into your pension tax-free is £40,000. However, for every £2 earned over £150,000 in a year that £40,000 ‘annual allowance’ declines by £1 - until the minimum annual allowance of £10,000 is hit. So, someone earning £200,000 would see their ‘annual’ allowance decline by £25,000: the £40,000 annual allowance became £15,000. Anyone earning £210,000 or above would have an annual allowance of £10,000.

New rules (in force for the 2020/2021 tax year onwards):
Anyone earning up to £240,000 will have the full £40,000 ‘annual allowance’, meaning they can put up to £40,000 into their pension each year tax-free. Remember, this limit includes contributions made by your employer. For every £2 a person earns above £240,000 their annual allowance will be decreased by £1 - down to a minimum of £4,000 (not the previous £10,000 minimum). 
​
So… 

• Those earning £150,000-£240,000 will see their annual allowance increase to the £40,000 regular allowance
• Those earning £312,000 or more will have a £4,000 annual allowance
• Those earning between £240,000 and £312,00 your annual allowance will see their annual allowance gradually reduce from £40,000 to £4,000. 
  • ​The formula is £40,000 - ((YOUR ANNUAL INCOME - £240,000) / 2) = YOUR NEW ANNUAL ALLOWANCE

​*Please note I am glossing over certain important details like the difference between 'threshold income' and 'adjusted income'. For a more detailed explanation of the changes see this article from Money Marketing.

So what do I do?!

If your pension annual allowance is increasing: you will need to decide if you want to increase your pension contributions. There are good reasons for doing so: you are making a ‘tax-fee’ contribution to a (mostly) tax-free investment account. There is the potential to save a lot of tax. It is also attractive behaviourally: your savings are (usually) locked up until you are at least 55 years old, so you can’t spend it frivolously in the meantime. The flipside, however, is that you may have important costs, like school fees, to consider - and sacrificing income into a pension might not suit you or your family’s priorities right now. In short, if you are fortunate enough to have significant excess savings and/or income, then increasing your pension contribution is likely a good idea. 


If your pension annual allowance is decreasing: you will probably find your take home pay will increase (some companies will automatically reduce your pension contributions to your new annual allowance and might even pay you their usual pension contribution as salary). There are various tax-efficient strategies you can use to save excess post-tax income including ISAs and Offshore Investment Bonds. Investing in ‘Enterprise Investment Scheme’ funds might be appropriate. Additionally, you could contribute to your partners’ pension and/or choose to put more than the annual allowance into your pension (see below). In short, if you are making that much money and you are not optimising your income and savings from a tax-efficiency point of view then you should almost certainly take professional advice (yes, this is a potentially self-serving statement but that doesn’t make it any less true).

Should one exceed the 'annual allowance' ?

The annual allowance is not a limit on how much you can put into your pension; it is a limit on how much you can put into your pension tax-free. For some people, it may well be worth contributing more than their annual allowance. Reasons to do this may include that your employer matches your contributions (and so you make a 100% return on day one), the pensions grow free of income and capital gains tax, and also that pensions are free of inheritance tax (so if you never spend the money and leave it to your beneficiaries then it won’t be taxed at up to 40% when you die). On the flip side, you obviously would not have the income available to you to spend today (on things like school fees, for example) and you would also have to stump up the tax owed for going over the annual allowance (an example: if your pension contribution is £10k over the annual allowance and you are a 45% taxpayer then you are going to have to pay HMRC £4,500 in tax which you will have to fund from your regular, after-tax income).

​ If you would like to discuss this further

​TindleWealth offers all-encompassing financial advice that includes, if you wish, planning for pensions as well as every other financial aspect of you and your family’s lives.
 
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