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Pensions - Further details
Core Principle - people should be given a pensions system that is as easy to understand as possible, and encourages saving, while preventing abuse by the very wealthy.
In some areas (especially corporate and large contribution planning) the rules do not forbid, but simply make unwise, certain courses of action. Expect your Financial Adviser to sometimes say “Yes you CAN do XYZ, but .... ” and the “but” will be worth listening to.
All pension schemes must be Registered Pensions Schemes, and contributions are controlled by two allowances:-
- Annual Allowance - the amount you can invest each year.
- Lifetime Allowance - the overall fund size limit.
The amount of contribution that can be made in any one year on which tax relief may be obtained.
Currently (tax year 2013/14), set at £50,000.*
Note - if your earnings are less than this, then you will get tax relief on the amount of contribution up to your earnings. The first £3,600 of any contribution always gets tax relief, (even if you have no earnings).
You can put in MORE than the annual allowance, but any excess will generally be taxed, so if you wish to do so it is essential that you discuss it with your financial adviser. (This is an example of a “Yes you CAN, but....” situation).
So most people will be able to invest as much as they can afford, in order to build up a sufficient pension fund for their retirement.
It is also possible to move money from savings to pension, and benefit from tax relief in the process. This might well be worth discussing with your financial adviser, especially in the decade prior to your intended retirement. (The aim being to ensure that your post-retirement finances strike the right balance between income and capital).
It is also possible to make contributions on behalf of third parties, (such contributions are treated as having come from the member for purposes of tax relief). This offers scope for people to fund their spouses and dependants' pensions, if they so wish. Discuss this with your financial adviser.
*For pensions provided on a defined benefit basis, the value of benefits accrued each year will be translated into a notional fund, which is then used to assess your position re the annual allowance.
The maximum size of fund allowed*, currently (2013/14) £1,500,000**.
If you have multiple funds, this is an overall limit.
If your existing funds are above this level (or may grow so) then you need to consult your financial adviser. You may be able to protect your expected rights - contact your adviser urgently.***
* Not strictly true, your fund can build to any size at all, but the excess will be taxed when you take benefits, and the tax is designed to make it generally financially unsound to over-fund your pension.
** For pensions provided on a defined benefit basis, the value of benefits will be translated into a notional fund, which is then used to assess your position re the lifetime allowance.
*** The deadline to protect rights was 5 April 2009. HMRC will accept late applications where reasonable excuses exist. However, as several years' notice was given of this deadline, the bar to allowing a late application will be very high.