How will the pension changes affect you?
The Chancellor has announced plans to reduce the amount people can pay into their pension after they have taken a taxable sum. This will reduce the limit on personal and employer contributions to money purchase pensions from £10,000 to £4,000 per year.
Philip Hammond described the decision as a bid to ‘prevent inappropriate double tax relief’ which refers to a situation where earners aged 55 and over withdraw money from one pension and then reinvest it in another.
It's good to see that the Government recognises that there may be people over 55 who have taken a taxable payment from their pension who need to pay in more than £4,000 to rebuild their savings following a divorce and is consulting on how best to do this.
This added complexity could make it easy for people to fall foul of the rules. Professional financial advice has never been more important for people who have taken, or are considering taking, money from their pension.
How will the change work?
The pension freedoms which allow anyone aged 55 to take money from their pension fund have proved very popular with more than £7 billion being withdrawn by 240,000 people since they were introduced in April 2015.
Many of those who have taken money from their pensions have continued working and they (and their employer) still wish to pay into a pension.
The announcement in the Autumn Statement means that the amount that can be paid into a pension by some over 55s will be reduced to £4,000 each tax year from April 2017.
Am I affected?
If you haven’t taken a taxable payment from a money purchase pension scheme, the announcement won’t affect the amount you or your employer can pay into your pension. Similarly, if you have taken a tax free lump sum only, in most cases the change won’t affect you.
What counts as a taxable payment?
If you have left your pension invested and withdrawn taxable income (known as flexi access drawdown) or you have taken a lump sum, part of which was taxable (known as an uncrystallised fund pension lump sum), or purchased a flexible annuity, you will be impacted by the change. There are other less common circumstances that can also mean you will be impacted.
The importance of advice
There are now a wide range of options when it comes to taking money from your pension, getting advice based on your own circumstances can make a big difference to you and your family’s wealth.