This week marks the end of one tax year, and the beginning of the new 2017/18 tax year. For investment ideas, back to basics education and advice from the experts read Morningstar’s Guide to Planning for Retirement.
Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I'm joined today by Nathan Long from Hargreaves Lansdown, to talk about pensions.
Hello Nathan.
Nathan Long: Hi Emma.
Wall: So, we are coming up to the end of the tax year, and if you haven’t already taken advantage of your pension allowances for this tax year, in your SIPP and your workplace pension. What are they?
Long: So basically, you can pay up to 100% of the amount you earn from employment or self-employment and that’s capped at £40,000 a year. If you want to pay more than £40,000 you can do, but you need to have unused contributions from previous tax years to allow you to make higher contributions. And actually, it's worth bearing in mind that always the amount you can pay is limited to the amount you actually earn.
Wall: And of course, that’s not changing from the next tax year which is positive news and neither is the life time allowance although in previous tax years these have actually been reduced. But what is changing from April the 6th.
Long: It's a key change that’s coming in from 6th of April, is the change in what's called the money purchase on your allowance. Now, that’s if I have accessed my pension either by drawing a cash lumpsum where some of that has been taxed as income or if I have gone into income drawdown and drawn any income from that pension fund. If I have done that than basically I will have my limit to how much I can contribute is going to go down from £10,000 as is currently to £4,000 in the next tax year.
Wall: And what are the implications of that for investors?
Long: So that’s a really big change because actually if you are someone who is still looking to save for retirement, so we know people access their pension whilst they are still working. So, if you have got plans to squirrel away more money before you finish working, it is probably best to look to sort of pay it up this tax year rather than face a lower contribution next tax year. It generally has quite big implications to people who are looking to work longer and longer as we expect people will have to do so.
Wall: And what are ways of getting around this. I suppose one is to simply just leave your pension part alone for as long as possible?
Long: Absolutely, so don't access your pension that’s a good one, but that’s not always possible. One of the easiest way to do is to use income drawdown but access only your tax-free lumpsum. So, if you take just the 25% tax-free lumpsum you don’t actually trigger this lower allowance.
Wall: And for those individuals who do have the option to not touch that pension part they can perhaps use all the tax efficient savings vehicles, such as ISAs in order to create that sort of income.
Long: Absolutely so, if people have saved elsewhere then fine. Obviously, there is lots of people who haven’t taken that step and maybe looking to access for example their workplace pension where this could potentially be an issue.
Wall: And if in doubt seek professional advice.
Long: Completely.
Wall: Nathan, thank you very much. This is Emma Wall from Morningstar. Thank you for watching.
