Senior professionals and practice owners must keep abreast of new and impending changes to pension arrangements and assess whether changes are needed to existing future plans, experts have warned.
A new and welcomed pensions annual allowance regime came into force during lockdown. This very broadly permits those with income and pension contributions of up to £240,000 to be entitled to a pension annual allowance of £40,000 during the tax year.
However, the annual allowance, introduced on April 6 to take effect from 2020/21 onwards, will continue to be reduced by £1 for every £2 of income exceeding the threshold, as was the case previously.
The maximum reduction in annual allowance is now £36,000, leaving those with an income and pension contributions of £312,000, with a pension annual allowance of only £4,000. So, while the income threshold has increased, taxpayers do need to be acutely aware of their annual incomes and annual pension contributions to assess whether they may in fact have a lower pension allowance than they anticipated.
Implications of this, is that pension contributions exceeding the adjusted annual allowance, as well as any unused allowance carried over, will result in income tax being levied on the pension annual allowance at up to 45 per cent.
Furthermore, upcoming changes to pension freedoms will mean that, from 2028, people will be able to access their private pensions at the age of 57 rather than 55.
Ryan Harrison, private client partner at chartered accountants Leathers, said financial planning takes on even greater significance in light of continued tinkering and changes to the pension rules.
“The changes to the pension annual allowance are once again quite significant, but the timing of their introduction amidst lockdown has meant many people have not yet appreciated their impact or have not found the time to act. And while the 2028 changes are still some way off, those with existing retirement plans for that date or beyond may wish to look now at how they will be impacted to ensure they do not receive an unexpected tax bill or perhaps even a penalty from HMRC,” he said.
“We would encourage senior professionals and business owners who make regular monthly pension contributions to review their current arrangements and assesses contributions to ensure they correctly self-assess.
“Taking action now will help to protect more of your wealth for you and your family to enjoy in years to come. These are some of the most complex tax rules and trying to negotiate these yourself can be costly.
“Over recent years, we have supported senior NHS and private practitioners across the country in to ensure they navigate the rules correctly, but that becomes even more important to do so in light of new introductions to pension arrangements like these, which can quite significantly impact on existing planning.”
Mike Gordon, technical director and chartered financial planner at Perspective Financial Group, added further advice.
“Whilst the changes to the Annual Allowance from 2021 may remove tapering of the allowance for many, the “sticking plaster” announced last November for the 2019/20 scheme year requires action to be taken to ensure that the tax charges are ultimately funded by government as promised,” he says.
“Furthermore, on the horizon in April 2022 are further changes relating to age discrimination rulings which will add further complexity which many will find confusing but ultimately could mean good news for younger medics who have joined the 2015 scheme.
“The details are still subject to consultation, but the changes could potentially make people better off, although individual advice will be required.”
