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February 2019

Tax Relief and Pensions

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Annual and lifetime limits

When it comes to managing money, one of the things some people find most difficult to understand is the tax relief they receive on payments into their pension. Tax relief means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you get on your pension contributions.

Tax relief on your annual pension contributions

If you’re a UK taxpayer, in the tax year 2018/19 the standard rule is that you’ll receive tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. Any contributions you make over this limit will be subject to Income Tax at the highest rate you pay. However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

But, there is an exception to this standard rule. If you have a defined contribution pension and you start to draw money from it, the annual allowance is reduced by £1 for every £2 income where adjusted income exceeds £150,000.

The Money Purchase Annual Allowance (MPAA)

In the tax year 2018/19, if you start to take money from your defined contribution pension, this can trigger a lower annual allowance of £4,000. This is known as the ‘Money Purchase Annual Allowance’ (MPAA).

That means you’ll only receive tax relief on pension contributions of up to 100% of your earnings or £4,000, whichever is the lower.

Whether the lower £4,000 annual allowance applies depends on how you access your pension pot, and there are some complicated rules around this.

The main situations when you’ll trigger the MPAA are:

  • If you start to take ad-hoc lump sums from your pension pot
  • If you put your pension pot money into an income drawdown fund and start to take income

The MPAA will not be triggered if you take:

  • A tax-free cash lump sum and buy an annuity (an insurance product that gives you a guaranteed income for life)
  • A tax-free cash lump sum and put your pension pot into an income drawdown product but don’t take any income from it

You can’t carry over any unused MPAA to another tax year. The lower annual allowance of £4,000 only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

Tax relief if you’re a non-taxpayer

If you’re not earning enough to pay Income Tax, you’ll still qualify to have tax relief added to your contributions up to a certain amount.

The maximum you can pay is £2,880 a year or 100% of your earnings – subject to your annual allowance.

Tax relief is added to your contribution, so if you pay £2,880, a total of £3,600 a year will be paid into your pension scheme, even if you earn less than this.

How much can you build up in your pension?

A pension lifetime allowance puts a top limit on the value of pension benefits that you can receive without having to pay a tax charge.

The pension lifetime allowance is £1,030,000 for the tax year 2018/19. Any amount above this is subject to a tax charge of 25% if paid as pension, or 55% if paid as a lump sum.

Workplace pensions, automatic enrolment and tax relief

Since October 2012, a system has been gradually phased in requiring employers to automatically enrol all eligible workers into a workplace pension.

It requires a minimum total contribution, made up of the employer’s contribution, the worker’s contribution and the tax relief.

For more information please visit our pension page  or book a chat with our expert team now.

retirement planning

Start Planning Early

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retirement planningThings you can do to increase your chances of success

The future may seem far away, but you need to start planning early. Regardless of your goals, there are things you can do to increase your chances of success! It is important to look objectively at your plans and adapt them as your priorities change over the years and you go through different life events.

Many of us have got things in mind we’d like to do when we retire, whether it’s travelling the world or simply doing more of what you love. But how can you save enough for a decent retirement without having to give up what makes life good today?

Eagerness to retire

According to research[1], almost three quarters (73%) of people aged 45 or over are longing for the day when their life is no longer confined by their working routine. Yet, despite an eagerness to retire, the research shows that almost half (46%) of over-45s with a pension have no idea how much it is currently worth, and that more women (52%) than men (41%) don’t know the value of their own pension savings.

Shift in lifestyle

A fifth (19%) of those aged 45-plus don’t have a pension in place yet. Two thirds of those aged 45- plus (67%) are hoping for a shift in lifestyle, keen to retire early before the State Pension age kicks in. But only one in ten of them (12%) has proactively increased how much they are investing in their pension when they’ve been able to, in order to help make this happen.

Pension freedoms benefits

Once people reach the age of 55 (age 57 from 2028), they can benefit from pension freedoms which allow them to start withdrawing money from their pension savings if they need to. It’s a point at which some key decisions can be made, and the importance of knowing the value of their pension should come sharply into focus. But, even among this group of people aged 55–64, some 45% still have their eyes shut and don’t know what their pension savings are worth.

For more information please visit our pension page  or book a chat with our expert team now.

Source data [1] The research was carried out online for Standard Life by Opinium. Sample size was 2,001 adults. The figures have been weighted and are representative of all GB adults (aged 18+). Fieldwork was undertaken in November 2017

Stephanie McClarence becomes a Fellow of the Personal Finance Society

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Ellis Bates Financial Advisers would like to congratulate Stephanie McClarence who has officially become a Fellow of the Personal Finance Society (PFS).

Stephanie started her career in financial services in 2013, initially focused on investment management and product research. While she had a hand in creating template paragraphs for suitability reports and providing guidance and support to Advisers with technical knowledge, her involvement in the advice process was at arm’s length for the first 4 years of her career, before moving into Paraplanning and now advising.

It was in March 2015 when Steph first decided she wanted to achieve Fellowship status and became fully committed to her studies, achieving a Diploma in Regulated Financial Planning by August 2016.

The road to becoming a Fellow doesn’t come without its difficulties so we asked Steph what the most difficult parts of her journey were:

“The most challenging thing I would say is trying to find a work/life/study balance. Doing these exams takes a huge commitment. Originally I was working in product research and not part of the advice process. I felt I was learning the material each time from a standing start with very little frame for reference. I had to work a little harder to figure out how the information I was absorbing would play out in practice.”

However, the team at Ellis Bates has always been there to lend a helping hand whenever needed;

“I’ve done 6 exams since starting at EB in August 2017 and the Regional Directors, Directors, etc have all been incredibly supportive. I knew that if I didn’t understand anything I could speak with someone who was an expert in the field, and they would be able to help break it down. Obviously, there was study leave available to me and the support in financing the exams as well, but the genuine excitement and support from every member of the company when they find out that you’ve passed an exam has been a wonderful experience. This definitely helped carry me through the next exam I had planned.”

The last exam Stephanie took, in 2018, meant she achieved Fellowship Status within the PFS and upon completion ensured she had all the tools available to make sure that any advice or guidance she was giving to clients would be the best it could possibly be. Becoming a Fellow of the Personal Finance Society is a wonderful bonus that went with that, and with only 2.4% of all PFS members being Fellows, it goes to show the great scale of Stephanie’s achievement.