Lowes Magazine Issue 116

PENSIONS

Monitoring your pension fund size

THE AMOUNT THAT PEOPLE CAN HAVE IN THEIR pension in a tax-favoured environment (The Lifetime Allowance), was increased from April in line with inflation – the consumer price index (CPI) – to £1,073,100. Despite the increase, this is still £726,900 less than it was eight years ago. While a million pounds may seem a large amount, over a lifetime of saving it can be easier to reach than many people assume. There are 13 ways HMRC tests to see if an individual’s pension has breached the limit, so it is a complicated issue. There is a tax charge if the total value of your pension is more than the Lifetime Allowance. Latest figures available from HMRC show that 4,500 individuals exceeded the lifetime allowance in a year, paying a total tax charge of £185 million. Compare that to the 760 individuals who paid £13m in 2006/07 and the trend is clear. For anyone who potentially could reach the limit in the years ahead, planning in advance is essential and our Consultants can provide advice to help pension savers stay within the limit and find alternative retirement savings strategies to complement their pensions in their retirement strategy.

Breaching the limit- a simple calculation Average amount saved per year:

£20,000

(Aggregated over 30 years) Matching employer contribution:

£20,000 £40,000

Total per year:

Multiply by 30 years of contributions

x30

Total:

£1.2million

Annual Allowance update Lowes Consultant Chris Large says: Alongside the Lifetime Allowance, HMRC also imposes an Annual Allowance, being the annual limit on how much an individual can pay into a pension each tax year. Going over the limit could incur an income tax charge.

Financial comfort and resilience

THERE HAVE BEEN NUMEROUS INDEPENDENT STUDIES demonstrating the empirical value of using Independent Financial Advisers, in terms of building investment and savings wealth, when compared to those who have not received advice. But a recent study by Royal London has gone one step further to prove the value of advice in improving the emotional wellbeing of customers by making them feel more confident and financially resilient. The study conducted amongst over 4,000 people concluded that “Advised customers who have an ongoing relationship with their adviser are almost twice as likely to feel in control of their finances than those who don’t.” The survey showed that this has been particularly evident during the current coronavirus crisis, revealing that those with Independent Financial Advice were more prepared for and better able to weather the difficult financial climate than their non- advised counterparts. The fact that professional advice delivers so much more to customers than the expected financial benefits is not new to us – our bi-annual survey of our clients proves it year-on-year – but it is always gratifying to have it confirmed by external authorities.

In 2016 the government introduced tapering. This affected high earners and reduced what they could pay into a pension from £40,000 anywhere down to £10,000; a breach of the allowance limit incurring a charge. This has since been reduced to £4,000. This created issues for some groups, particularly doctors and surgeons, in the NHS pension scheme, who in taking on extra shifts found their payments (based on percentage of salary) into the scheme unintentionally breached the allowance. In April 2020 government sought to address this issue with changes to the system. Now, anyone with an income under £200,000 (previously £110,000) has the full £40,000 allowance. Incomes above this fall under adjusted income rules – which are complicated but allow for employer and personal pension contributions up to £240,000 – and could be entitled to up to £40,000 allowance. Anyone with adjusted income between £240,000 and £312,000 are subject to tapering, on a 1:2 ratio for every £2 over the limit.

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