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Talking Point - Act now to avoid paying too much pension tax

On 6 April 2016 changes were made affecting the amount that can be saved into pensions. The changes will impact both savings into ‘defined benefit’ and ‘defined contribution’ schemes. The Teachers Pension Scheme, the NHS Pension Schemes and personal pensions will be affected.

Understanding your annual allowance

Annual allowance (AA) is the maximum amount that you can contribute to your pensions per year, without incurring a tax charge. The tax charge could be up to 45% of the saving above the AA depending on other taxable income, and your highest income tax band.

The AA is £40,000 for the 2016/17 tax year, but it will be tapered from 6 April 2016 for those with ‘adjusted income’ (taxable income including the value of any pension contributions) of more than £150,000.

People caught by this rule will have their AA reduced by £1 for every £2 income over £150,000, down to a minimum of £10,000 per annum.

"Many of our clients will be directly affected by the new annual allowance, but do not understand how ‘adjusted income’ may affect them. We can help them understand this and where appropriate establish effective strategies for their longer term needs and objectives"

Stephen Gearing DIPpfs,
Senior Financial Consultant, Wesleyan

Protecting your lifetime allowance

On 6 April 2016 the Lifetime Allowance (LTA) was reduced from £1.25 million to £1 million. If your pension savings are worth more than £1 million, or you expect them to be worth more than £1 million when you take benefits, then you may be able to apply for LTA protection. LTA protection is designed to provide you with a personal LTA which is higher that the standard LTS of £1 million - therefore reducing or eliminating the LTA charge when benefits are taken.

You will be able to apply to HMRC for one or both of two new protections. These are known as Fixed Protection 2016 (FP2016) and Individual Protection 2016 (IP2016). Applications can be made via a new on-line self-service system (available from July 2016).

If you wish to take benefits between 6 April 2016 and July 2016 and rely on either IP2016 or FP2016 you can make a temporary application in writing to HMRC.

This application will then need to be followed up by a full online application once available in July.

"We are able to establish our clients current pension benefits and assess these against the Lifetime Allowance, projecting forwards to see how pension benefits could grow up until retirement, allowing clients to see their own future pension income."

Sara St Rose,
Financial Consultant, Wesleyan

If you would like to discuss any aspect of your personal finances with a Financial Consultant call us today on 0800 107 1443.

'WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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