Your shrinking pension allowances

The cuts and adjustments made to the two main pension allowances since 2011 have made retirement planning all the more complex.

The lifetime allowance, which sets an effective tax-efficient ceiling on the total value of pension benefits, was £1,800,000 in 2010/11. Back then, the corresponding annual allowance, which sets an effective tax-efficient ceiling on annual pension contributions, was £255,000. Dividing the lifetime allowance by the annual allowance suggests it would have taken about seven years of contributions at the rate of the annual allowance to reach the lifetime allowance. In theory at least, you could have deferred pension planning until less than ten years before your retirement date.

For 2016/17 the lifetime allowance is £1,000,000, while the annual allowance has a £40,000 maximum for most people. So now it would take 25 years to reach the maximum, based on dividing the current lifetime allowance of £1,000,000 by the annual allowance of £40,000 – and ignoring any investment growth. These two calculations underline how important it has become to start pension planning as soon as practical and keep making contributions each year. There is scope to carry forward unused annual allowances, but only for the previous three tax years. For example, you have until 5 April 2017 to mop up any of your unused £50,000 annual allowance for 2013/14. However, you must first have exhausted the current tax year’s allowance. 

To complicate matters further, the private sector final salary schemes and HM Revenue & Customs use different valuation bases, so a transfer could push you over the lifetime allowance, even with no fresh contributions. The constraints now applying to both the lifetime and annual allowance make regular reviews of your retirement strategy all the more important, particularly if you are considering large contributions as the tax year end approaches. 

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Occupational pension schemes are regulated by The Pensions Regulator.

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