Pensions: Chancellor’s Tax Relief overhaul plans
Chancellor George Osborne announced during the Summer Budget his proposals to radically overhaul tax relief on pensions. He invited industry executives to consult on his plans with the publication of a Green Paper.
Effectively, pension contributions could be paid from taxed income, however no tax would be paid when savings are cashed in. In return, tax relief would no longer be offered on contributions.
In the foreword to the paper titled ‘Strengthening the incentive to save: a consultation on pensions tax relief’ George Osborne said: "With increased longevity and the changing nature of pension provision, the Government needs to make sure that the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement." In layman’s terms, people are now living longer and if they want to enjoy their ‘golden years’ they need to have the means to pay for it without relying on state benefits.
Currently, a state pension is funded by National Insurance (NI) contributions, to give people who’ve reached state retirement age a guaranteed weekly income, which is presently worth £115.95 a week for a single person.
Married couples, who have built up the full number of state pension qualifying years, will receive double that amount at £231.90 a week.
Those on a low income can boost basic state pension by claiming Pension Credit. This increases their income (based in 2015) up to £151.20 a week for a single person and £230.85 a week for a couple.
So how does this affect your clients?
As an example, a UK taxpayer in the tax year 2015-16 can receive tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance, whichever is the lower:
- If annual income earned is £20,000 but an amount of £25,000 is paid in to a pension pot (i.e. by topping up earnings with savings), then tax relief will be based on the income of £20,000.
- Similarly, if an annual income of £60,000 is earned then the tax relief allowance would be based on £40,000. Any contributions made over this limit will be subject to Income Tax at the highest rate applicable.
There are other options available. There is the choice to delay claiming basic state pension, which can be especially useful if a person chooses to work beyond retirement age. However this option to defer receiving payments is only available once a claim has been made and this can only be done one time. For every five weeks a person delays, the future weekly allowance is increased by 1%. So if a person chooses to delay for a year, they would receive the full pension plus 10.4% extra.
The ‘lifetime allowance’ puts a capped limit on the value of pension benefits that a person can receive without having to pay a tax charge. The lifetime allowance is £1.25 million for the tax year 2015-16 (falling to £1 million in April 2016). Any amount above this is subject to a tax charge of 25% if paid as pension or 55% if paid as a lump sum.
The table below shows the current age for retirement thus being able to then claim a state pension.
However, the official retirement age is gradually being raised, so while women receive at 62 and men at 65, this age will rise to 66 for both genders by 2020, then 67 by 2028 and is predicted to possibly even be age 68 by the 2030s. To find an exact retirement age see the Government’s State Pension Age Calculator.
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