Don’t be caught out by new pension changes

£10,000 and few were likely to want to exceed that. The cut to £4,000 is a bigger deal. So, what is going on? Prior to the 2015 pension freedoms the MPAA did not exist.

The measure was brought in to limit the extent to which pension savings can be recycled to take advantage of tax relief – deemed not in the spirit of the reforms.

The Treasury stated: “The Government does not consider that earners aged 55-plus should be able to enjoy double pension tax relief.” Fair enough. However, it has been suggested that a saver, unaware of the imminent MPAA reduction, perhaps needing some ready money to pay off a debt, could be tempted to cash in an old pension policy ahead of their retirement date. That would be a bad move because, when the new regime comes in, they will get clobbered if they unwittingly go over the new £4,000 limit, with anything put into a pension above this taxed at the individual’s marginal rate, 20 per cent, 40 per cent or 45 per cent.

And, making it harder to understand all the ins and out, the wider pension saving provisions can also lead to confusion.

You can save as much as you want into a pension. You will receive tax relief on the full amount, provided this is not greater than your annual earnings or the annual allowance (AA).

So, for example, a pension scheme member with UK earnings of £25,000 can receive tax relief on contributions up to £25,000, and pro rata up to a £40,000 limit. In practice, unless an employer is trying to make unreasonable contributions, they will be able to claim tax relief.

The AA was introduced in 2006 at £215,000. This progressively increased to £255,000 but was slashed in 2011/12 to £50,000 and then further cut to £40,000 in 2014/15 where it has remained.

The annual allowance applies across all the schemes you belong to, it’s not a ‘per scheme’ limit and includes all the contributions that you or your employer pay.

The AA is tapered for those earning more than £150,000, being reduced by £1 for every £2 over this figure. The maximum reduction is £30,000 so those earning £210,000 have an AA of £10,000. If pension payments exceed the AA, once again the individual is subject to a tax charge at their marginal rate.

Personal contributions – those paid by the individual – are limited to 100 per cent of earnings (or £3,600 if higher) while employer contributions are not limited.

For those contributing to a pension that provides ‘money purchase’ benefits such as a personal pension or a defined contribution pension scheme, it’s the total of personal and employer contributions that is tested against the AA.

For members of defined benefit schemes, it’s the increase in the value of the member’s rights that is tested.

The system certainly has its complications.

But, remember, saving for a pension is vital if you are to avoid financial struggle in your old age. Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull. Email:tilaw@meritofs.com