The recent budget and its impact on pensions is a good place to start for the Money Matters blog. Many consultants will be affected by the changes to tax relief on pension contributions made on or after 6 April 2011. Although the Chancellor, Alistair Darling, hasn’t got rid of higher rate tax relief on pensions completely, he has made far reaching and sweeping changes which will affect consultants earning over £150,000.
It is intended to restrict tax relief for those earning over £150,000, with a gradual tapering down of relief, so that anyone earning over £180,000 will only receive basic rate tax relief on contributions. There will be no advantage in increasing investment between now and 2011 as these new rules would apply immediately for those whose income now, or in the previous two tax years, was more than £150,000 and who make any changes from their normal pattern of contributions or the normal way they accrue benefits. This is designed to remove any advantage of increasing pension contributions prior to 6 April 2011.
More investigation is needed to establish the full impact of the small print, especially with regard to how this will affect NHS pension contributions and added years. There is no doubt that these sweeping new measures will affect a lot of consultants and their pension planning from 2011 onwards.
For those earning less than the thresholds above there will still be the ability to claim 40% tax relief on pension contributions, so now is the time to consider boosting contributions before higher rate tax relief gets removed completely. Pension planning has always been a tax advantageous way of saving for retirement, as 25% of the fund can be taken free of tax prior to the residual fund being used to fund an income in retirement. A quick example can show how tax effective pensions are. Tax relief on contributions at 40% and the ability to claim back 25% of the fund tax free at retirement makes pensions a must for higher rate tax payers. A fund of £100,000 will effectively only cost the investor £35,000. This is only looking at the contributions made and not considering any growth in the fund.
Investing in pensions does not necessarily mean taking risk with the funds. Investing into a cash fund is low risk, whilst still taking advantage of the tax allowances for higher rate tax payers, whilst they are still available. The additional pension scheme through the NHS, which replaced added years last year, is also a low risk option, whilet still benefitting from tax advantages.
We will cover the pros and cons of different pension planning routes in future blogs and provide updates on the changes announced in the budget as soon as we can.
● Justine Roberts is a director of Medical and Financial, which provides independent financial consultancy to doctors. Contact her at Justine@medicalandfinancial.com, or visit www.medicalandfinancial.com for more information.
Tags: Pensions
