Five years ago HMRC introduced their new plans for pension simplification heralding the start of a new era for retirement savings. It was named ‘A’ day by the press and this symbolised the fresh start these new rules offered. Pension investment has continued to grow in popularity as a financial planning tool, with Contractors now able to secure the equivalent of up to 69% tax relief on contributions…
The ‘A’ Day rules that came in to force in 2006 have made pensions much simpler to exploit for most investors, with a set individual lifetime allowance of £1.8 million and an annual allowance now of £50k pa. Whilst the general population can only fund up to 100% of salary, ‘employer’ contributions have no link to earnings and so a Contractors one man limited company can fund up to the annual limit irrespective of salary. This means that within these limits, Contractors can choose to personally invest up to 100% of salary into a pension and benefit from tax relief at your highest marginal rate with the company topping up to the annual limit.
Thanks to ‘A’ Day, Contractors now have far greater flexibility in the size and timing of your contributions which suits the nature of your earnings perfectly as you can contribute more when you are in a good contract and less when you’re not. Another popular development amongst our clients has been the option for you to release up to 25% of your pension fund as a tax free cash lump sum when you reach age 55, without you having to formally retire.
Since 2006, the amount of tax that you can save on your pension’s contributions has increased considerably in line with savage changes to the personal allowance and the tax brackets. Those using salary sacrifice save up to 39% on pension’s contributions as even basic rate tax payers and higher rate payers save up to 49%. However, if you earn between £100k and £115k then you could save as much as 69% in tax by sacrificing your salary and investing in a pension. This is because following last year’s budget, anyone earning over £100k will lose £1 in personal allowance for every £2 they earn, until the personal allowance is eroded completely when you reach £114,950.
The tax savings available on pension contributions therefore offer a compelling argument for using pension investment as a key tax planning tool, irrespective of how you plan to provide an income for your retirement.
With the ability to borrow against the fund to help buy property, to invest on behalf of a spouse or children and far greater freedom on how to take benefits too, it may be time to revisit the opportunities that pension planning can represent.