Yet another very misleading article – this time from the Telegraph.
They link the freezing of the tax- free lump sum at £268,275 with the removal of the Lifetime allowance. Nonsense – it was already frozen and most commentators’ did not anticipate an increase. If anything, they were concerned that it could be considerably reduced.
The Telegraph claim that “ the tax-free freeze could deter higher rate earners from saving into their pensions”. It certainly shouldn’t
The removal of the Lifetime Allowance should achieve its objective of removing the disincentive for high earners to remain in employment and thus build more pensions which will exceed the previous lifetime allowance.
There are two fundamentally different types of pension fund. The traditional final salary type scheme found in NHS, Civil Service, and some large companies and the “money purchase” scheme offered by most employers and available to the self-employed.
The removal of the Lifetime Allowance was primarily aimed at stopping the early retirement of senior NHS employees who, when they discovered that any additional pension they earned would be taxed at 55%, decided that enough was enough, and took early retirement.
The removal of the Lifetime Allowance should stop that happening and, together with the increase in the annual allowance to £60,000, will produce some very attractive investment planning opportunities for high earners.
If we take a 55 year old higher rate tax payer saving an additional £30,000 pa into a pension plan over the next 10 years with a growth rate of 5% the accumulated fund will be £379,000. Pay 40% tax on that level of income and the net £18,000 invested for 10years at 5% would have only grown to £227,000 .A staggering difference of £152,000.
Admittedly any income withdrawn from the pension plan will be taxable but if it’s not withdrawn and continues to grow tax free you have a great Inheritance Tax planning product.
The same principles apply to “money purchase” plans. Many higher rate tax- payers did not want their fund to exceed the Lifetime allowance and contributions were restricted by the annual allowance. The tax planning opportunities by using the changes in pension legislation are now huge.
I would hate to think that misleading articles from the press put people off from exploiting those opportunities.
If you would like to know more just text me on 7770575122 and I will be in touch.
If there is sufficient demand, I will also put together an on-line workshop. If you are interested just say so in the comments.
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