Pension Planning Early

It is a well-known fact that starting a pension earlier in life will help create better retirement outcomes later. However, the focus of this blog is about planning as early in a tax year as possible. There are many benefits to doing this, in particular it allows individuals to recognise what opportunities they may have for making pension contributions and spread the cost (and the investment risk) over the year.  

In recent years, the introduction of the Tapered Annual Allowance (TAA) has restricted many, in what they can contribute to their pension within a single tax year. The standard Annual Allowance (AA) has remained consistent, since 6th April 2014, at £40,000 or up to 100% of taxable income, whichever is lower. This has been particularly true in sectors such as energy which boasts a significant proportion of higher earners.  

The UK Government tweaked the rules in April 2016 and introduced the TAA, effectively a sliding scale requiring more detail around calculations, and could reduce the AA from £40,000 down to as low as £10,000.  

2020 was an unusual year, as we know all too well, however there were some developments in the pension rules announced in the UK Spring Budget 2020, but these amendments were missed by many. The rules surrounding limits used to calculate TAA were amended upwards to a very welcomed increase of £90,000 on top of the previous values.  

The increase means Tapering only applies once ‘adjusted income’ is greater than £240,000, which has helped remove a lot of employees from the TAA calculations. Very welcome news to many who had previously reduced pension contributions down to £10,000 per tax year or had simply missed opportunities to make considerable extra contributions as they did not want to incur a tax charge.  

For employers with executives and high earners, it may be a great opportunity for the HR teams to encourage these employees to engage and review their pension planning. A great starting point would be to note anyone saving £833 per month in total, as this was likely done to keep them under the £10,000 TAA that may no longer apply to their personal situation.   

Due to the complexity of what counted towards adjusted income the communication is probably best targeted to employees earning over £110,000 p.a. as there is potential this may have impacted their planning decisions in the past. At the very worst the communications might just give them peace of mind they are doing the right things or get them thinking about if they have enough pension provision.  

For every upside there tends to be a downside and, in this case, the TAA now has a minimum value of only £4,000 rather than £10,000. It would be prudent of company HR teams to check the very highest of earners in their business are aware they may be creating a personal tax liability on anything above £4,000 they contribute to pension.  It’s very important to recognise that pension contributions to be measured against these allowances, include both employee and employer values.  

The effect of the new Tapered AA (TAA) can be seen in the table below: 

Adjusted Income	Minimum TAA Pre 5 April 2020	Minimum TAA Post 6 April 2020
£240,000	£10,000	£40,000
£250,000	£10,000	£35,000
£260,000	£10,000	£30,000
£270,000	£10,000	£25,000
£280,000	£10,000	£20,000
£290,000	£10,000	£15,000
£300,000	£10,000	£10,000
£310,000	£10,000	£5,000
£312,000	£10,000	£4,000
£312,000 +	£10,000	£4,000

 

There is a lot of detail and calculations not been included here, for the very simple reason it gets complex, especially when you add in the ability to utilise previously unused allowances going back a further three tax years.  

For anyone that discovers they have paid in values over and above their AA or TAA, they may yet have potential to make use of ‘Scheme Pays’ which could pay any tax liability from within the pension funds itself. Not brilliant for pension planning but certainly more tax efficient than simply paying from personal wealth.  

Understanding the impact these changes may have is the responsibility of both employers and employees. Employers should advise their staff about these changes, but ultimately it is every individuals responsibility to ensure their pension planning is being managed in the most tax efficient way possible.  

Pension planning and understanding the various options available is for everyone, not just the highest earners. If you would like any further information please contact Richard Petrie or your usual AAB contact.  

Find out more about our Employee Benefits team here.