A nest egg cap by George is April's certainty
There has been much talk in both the financial and mainstream press about the possible changes to pension contribution rules that could be announced by Chancellor George Osborne at the Budget on Wednesday March 16th, writes Sat Singh, chief executive of ContractorMoney.
One tax raid or two?
Much of this murmuring has been concentrated around rumoured changes to the tax relief regime, which, in the absence of the current generous levels of tax-saving opportunities, might lead many top income-tier contractors to question their entire retirement savings strategy and look elsewhere for more lucrative growth prospects.
Of course, at the moment none of us truly knows with any certainty what will be announced until the Red Book opens on the 16th – and that uncertainty is not just hanging over the pensions chapter; many in the contractor space would like to see rethinks on dividend taxation, expenses and the NI Employment Allowance removal. However, one thing that we do know high earners should be anxious about, as it has been already announced (at Budget 2015), is yet another reduction in the lifetime allowance on pensions.
From 6th April 2016, the maximum amount that an individual can save into their pension over their lifetime, with no additional tax consequences, will be reduced from £1.25million to £1million. This is not expected to affect the vast majority of the population, but for wealthy contractors, to whom pension contributions can provide a valuable tool for tax efficiency, this change will make it even more important that they regularly review the status of their pension investments. Ideally, this review should be carried out with a financial advisor who, if necessary, can make recommendations for alternative investment opportunities.
Erosion and Protection
The lifetime allowance was introduced by the government in 2006 and was initially set at £1.5m. It has been reviewed regularly since then and hit a peak at £1.8m in April 2010, before reducing back down to £1.25m from 2014. When it was first introduced, and at every point where a reduction has occurred, those individuals with pension savings at or approaching the lifetime allowance (or those expected to reach it before retirement), could apply for protection.
From April 2016, those who will be affected by the new rules will be able to apply for either Fixed Protection, which will cover them up to £1.25m (as long as no further pension contributions are made), or Individual Protection, which will allow for contributions to continue where there is an existing pension holding of £1m. A reputable IFA will be able to provide you with tailored guidance on which is most suitable to you.
This time around things are slightly different to how they have been in the past because, from this point onwards, the lifetime allowance isn’t expected to be reduced any further. Plus, from April 2018 the allowance will be indexed in line with the Consumer Price Index (CPI). Some commentators (and newspapers) hope that the lifetime allowance will eventually be abolished, which may happen with a future government. But in the meantime, at least the playing field will have finally been levelled off, which will make long-term pension planning for high-earning contractors more straightforward, especially as unlike previous versions of pension protection (which had strict periods within which a claim could be made), there will no application deadline associated with the 2016 change.
Evaluate, review, diversify
If you’re a contractor who suspects that you’re likely to be affected by the lifetime allowance curtailment, then you should contact your pension providers to obtain valuations of your holdings. Depending on your individual circumstances and suitability, this could be the right time to seek out alternative opportunities, ranging from the ever faithful ISA to more specialist and innovative products tailored to those with only distinct tax-saving objectives.
Ultimately, looking outside of the traditional pension wrapper could be beneficial to some contractors, who tend to have high levels of wealth at a young age. Doing so could open you up to new ways to diversify your portfolio and exploit new investment opportunities, which could deliver the tax optimisation you might be now be prioritising afresh, in light of the lifetime allowance abating.