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New tapered Annual Allowance: high earners should review their pension contributions now

If you earn more than £150,000 then the new tapered annual allowance, which comes into effect from the 6th April 2016, is likely to affect you.
 
The change in rules means that high earners will see their annual allowance restricted to a figure as low as £10,000. To put this into context, a person who earns more than £150,000 will see the tapered allowance come into effect with a £1 reduction in their annual allowance for every £2 of income above this threshold. Those who have an income of at least £210,000 will see the minimum allowance of £10,000 apply, however it may be possible to utilise unused allowances from previous years.
 
If you are a high earner, what can you do?
 
Those who face a significant reduction in their future annual allowances should consider speaking to their financial adviser about maximising their pension contributions before the end of this tax year.
 
How do I calculate my adjusted income?
 
Adjusted income is the measure used to decide whether a person’s income exceeds the £150,000 threshold. The calculation which will be used will include net income for the year, i.e. earnings, interest and pension contributions made by the individual and the employer. Personal pension contributions that benefit from tax relief at source are not added in separately, as they are already included within net income.
 
Employer and personal pension contributions are included in the calculation so that the net income for the year cannot then be reduced by entering into a salary sacrifice agreement or by increasing pension contributions. These contributions will be included and tested against the £150,000 threshold.
 
What happens if my income fluctuates? 
 
If your salary rises and falls each year, then your annual allowance could constantly change too. It would be wise to work closely with your Wealth Planner to ensure you benefit most when the full allowance is available. 
 
For example, a client whose adjusted income fluctuates between £150,000 and £210,000 could go from having a £40,000 annual allowance one year to £10,000 in the next year. Therefore, they should aim to maximise pension contributions in the years when a higher allowance is available.
 
For very high earners the reality is that high levels of pension funding will no longer be possible. This means considering alternative retirement saving strategies once the annual allowance has been used, such as tax efficient ISAs.
 
If you are a high rate tax payer and would like to find out more about the new tapered annual allowance and potentially using previously unused pension allowances then please get in touch.

Date Issued: 19.2.16

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.