For investment ideas, back to basics education and advice from the experts read Morningstar’s Guide to Planning for Retirement. Here, David Newman, Head of Pensions at Close Brothers Asset Management breaks down the changes due to pension and savings in the new tax year.
The run up to the new financial year is the perfect opportunity to ensure your finances are in order. Tomorrow will see several changes and schemes introduced, many of which could affect your investments, your pension or your savings – so it’s important to take action over the next few weeks, whether that be using up any allowances before they disappear forever, or capitalising on many of the new opportunities on offer.
Make Full Use of Growing ISA Limits
From tomorrow, the contribution limit for a standard ISA will increase to £20,000 a year and the new limit for Junior ISAs will be £4,128. These increases follow a reduction in the amount people can pay into their pensions, so prudent savers should be taking advantage of these limit increases for additional savings with an even more robust tax wrapper.
Remember that today is the final day to make ISA contributions of up to £15,240 for the current tax year. Don’t leave it to the last minute – you could miss out on the opportunity to capitalise on this year’s 2016 allowance benefits too.
Lifetime ISA Opportunity
The much talked-about Lifetime ISA will soon be available to people aged 18 to 40, who will be able to save up to £4,000 per tax year, to which the Government will add a 25% bonus.
This is a no-brainer for first-time buyers as the state will add a 25% bonus on top of what you save – meaning up to £32,000 of free cash. It’s important to remember that saving into a LISA versus a pension fails to appreciate the cumulative effect over time of employer contributions – so make sure any additional savings vehicles you choose don’t get in the way of your workplace scheme.
£1,500 Pension Advice Allowance Gift
This will allow people under the age of 55 with a defined contribution pension to withdraw £500 on up to three occasions, but just once per tax year, from their pension pots tax-free to put towards the cost of pensions and retirement advice. Make sure you ask your employer for how you can access your allowance so you can benefit – this type of advice could be invaluable in you making the most of your pension savings.
Money Purchase Annual Allowance Danger
From tomorrow, the Money Purchase Annual Allowance (MPAA) is due to be reduced from £10,000 to £4,000, designed to limit individuals who have already accessed pension savings to 'recycle' this cash back into pensions and benefit from tax relief for a second time. If you want to access cash flexibly, ensure you avoid exceeding the £4,000 limit to be safe in the knowledge that you don’t face unexpectedly high tax bills.
Remember to Top Up Your State Pension
If you will reached state pension age before April 5 2016, today is the deadline for making voluntary contributions to top it up.
You can get between £1 and £25 extra per week by applying to make a lump sum payment by 5 April 2017, via gov.uk website. If you have gaps in your national insurance record from a period of unemployment for example, voluntary contributions can be a cost effective way of increasing the value of your pension.
Carry Forward Any Unused Allowance
From tomorrow, the amount you can ‘carry forward’ is changing. This rule allows people to make use of any unused pension allowance from previous years, and this is the last tax year that you will be able to carry forward any unused annual allowance from the 2013/14 total of £50,000 before it drops to £40,000. If you have extra allowance to use up, it’s important to make as significant of a contribution as you can before tomorrow, to avoid potentially missing out on up to £50,000 of relief.
Avoid Child Benefit Tax Charge
A personal pension contribution can preserve the value of child benefit, rather than being lost to the child benefit tax charge. Child benefit is worth over £2,500 to a family with three children, but is cancelled out by the tax charge if your taxable income exceeds £60,000. The combination of higher rate tax relief on the contribution plus the child benefit tax charge saved can lead to effective rates of tax relief as high as 65%.
DB Members: Protect Your Pension Provision
The new tax year is also the deadline for applying for Individual Protection 2014 (IP14). While it seems complicated, it can give you the chance to protect against the punitive tax charges of the lifetime allowance which kicks in when pension assets hit £1 million.
This is especially relevant for people in lucrative and long term defined benefit pension schemes, many of whom won’t realise how close to this threshold they currently are. As long as the value of your assets were worth more than £1.25 million as of April 5 2014, you still have a small window to submit your application – so use the next few weeks to check whether you’re entitled. Taking action now to protect your pensions from the Lifetime Allowance could save you hundreds of thousands of pounds worth of tax in the long run.
Capital Gains Tax
Up to £11,100 is available tax free, every tax year, yet many don’t make the most of this allowance. Unless you use your exemption by the end of today, you’ll lose it for 2016/17, so consider ways you can apply it to your portfolio.
