As we welcome in a new tax year, here is a look at pension planning for 2019/20.
Now that all the last-minute end of tax year pension planning is complete it is time to turn to 2019/20.
Although the pension tax regime has remained relatively stable over the last few years, a new tax year always brings a few changes along with a fresh set of allowances to make the most of.
The main rates of tax relief on contributions as well as the annual allowances remain unchanged. For those unaffected by tapering or unrestricted by the money purchase annual allowance this is generally good news, with the £40,000 allowance providing adequate scope for most to make reasonable pension provision.
And there is no need to wait until the end of the tax year; now is a great time to start, or increase, a monthly pension contribution.
The increase in the personal allowance to £12,500 and the basic rate band to £37,500 benefits those in the decumulation phase, allowing more opportunity to take their funds as tax efficiently as possible. By taking an uncrystallised funds pension lump sum or using the same 25% tax free cash/75% income combination via drawdown, people can potentially withdraw up to £16,666 without paying any income tax and £66,666 without falling into the higher rate tax band.
The other small positive for those taking benefits is that the Lifetime Allowance has increased by slightly more than the Consumer Price Index (CPI) to £1,055,000. Although this is still low in historic terms, the extra £25,000 could save up to £13,750 of tax (the Lifetime Allowance charge at 55%) for those that have put off crystallising benefits to the start of the new tax year.
In terms of pensions funding, the increases in the personal allowance and basic rate band combine to mean that higher rate tax relief on pension contributions will now be restricted to earnings in excess of £50,000.
The £12,500 personal allowance also leads to a large increase in the “60% band”. Now, income between £100,000 and £125,000 is subject to this very high marginal rate of tax. Pension contributions can help reinstate the personal allowance and reclaim this tax and for someone earning £125,000 a pension contribution of £25,000 can be made at a net cost of just £10,000.
In terms of carry forward, for those who haven’t previously exceeded the annual allowance, the good news is that the complexities of the transitional rules for the 2015/16 tax year fall out of the equation. The relevant carry forward years are from 2016/17 and so all the pension inputs align with the tax years. Although, unfortunately, you cannot forget the previous rules entirely, as they may still need to be considered where there have been any recent excesses.
Finally, high earners should also be aware that they now need to calculate their threshold and adjusted income levels in the current and previous three tax years for the purposes of the tapered annual allowance, making any carry forward exercise even more complex. The scope to use carry forward to cover any excesses may also be further restricted and more high earners will be seeking alternatives to pensions to save for their retirement.
If you have any questions about the above, please contact a Finura adviser.
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