How high earners can plan their pensions

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

There is a lot of media speculation about pensions at the moment. Some newspapers are sounding the alarm that a tax raid may be coming in the Autumn, when the Labour government is expected to release its October Statement.

Given the uncertainty of the UK’s pension policy landscape right now, how can individuals plan their retirement effectively? In particular, how can higher earners protect their hard-earned wealth and safeguard their long-term financial goals?

Below, our Lincoln financial planners offer some reflections. We hope these are useful to you. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:

01476 855 585
info@casfin.co.uk

Do not delay planning

Perhaps you are in your 40s or 50s and have not seriously considered your retirement plan until now. It is never too late to start. Remember, any contribution you make will be tax-free up to your annual allowance, also enjoying tax relief.

In 2024-25, the standard annual allowance for pension contributions is £60,000 (or up to 100% of your salary, whichever is lower). So, a Higher Rate taxpayer on a £60,000 salary could, therefore, contribute all of this amount in 2024-25 and enjoy 40% tax relief in total.

This rule system is still in place in September 2024 and is unlikely to change before 30 October, when the Autumn Statement is expected. So, if you are concerned about a possible change in pension tax relief rules, you still have time to discuss your contribution strategy with a financial adviser here in Lincoln.

The Lifetime Allowance

Not long ago, there was a “limit” on the total tax-free amount someone could save in their pensions (the Lifetime Allowance, or LTA). In 2021-22 this limit stood at £1,073,100. However, the LTA was “removed” following changes announced in the Autumn Statement last year.

The new system in 2024-25 is quite complicated. However, whilst the LTA is “gone”, there is now a cap on the total value an individual can withdraw from their pensions as a tax-free lump sum. This figure is £268,275 (i.e. 25% of £1,073,100), and tax-free lump sums are still limited to after an individual reaches their Normal Minimum Pension Age, which is 55 in 2024-25.

There is some speculation that the Labour government might change the LTA rules in the October budget. The party ruled this out during the general election campaign, although it had proposed reintroducing the LTA earlier. Given this uncertainty, it seems reasonable to assume that we cannot rule anything out at this stage. Consider speaking with a financial adviser about your retirement plan in light of the LTA and possible changes.

Opportunities and pitfalls to note

Are you an employee? If so, consider taking time to review your benefits package. There could be certain “pension perks” that you may not be fully taking advantage of. For instance, some employers offer a “matching scheme” where the organisation matches your (the employee’s) contributions up to a certain limit, such as 10%. If you can afford to maximise this benefit as a high earner, it could double the value of your pension contributions.

If you are a business owner, be wary of the temptation to fall into a common thinking pattern – i.e. “My business is my pension”. Remember, businesses can fail for unexpected reasons, and this could threaten both your current lifestyle and future retirement plans. Using a pension assists with diversification. Even if your business falls upon hard times, your pension funds are “ring-fenced”. If things go well, your business could enjoy tax benefits, such as reducing National Insurance (NI) and corporation tax (employer contributions are an allowable expense if made for the purposes of trade).

Be mindful of the limits

Not all high earners enjoy the same pension tax benefits. A case in point is the annual allowance, which is reduced (“tapered”) by £1 for every £2 of “adjusted income” over £260,000 (and if your “threshold income” is above £200,000). Adjusted income includes total taxable income and the value of pension contributions (including those made via salary sacrifice). Threshold income is defined in broadly the same way, but without including any pension contributions. Both conditions must be met for annual allowance tapering to apply, and this can reduce an individual’s annual allowance to as low as £10,000.

Individuals with these kinds of earnings may benefit from exploring options with a financial adviser. Pensions are still useful for retirement planning. However, a more nuanced approach may be required to ensure a tax-efficient strategy.

Also, be mindful of the Money Purchase Annual Allowance (MPAA), which reduces an individual’s annual allowance to £10,000 when triggered. For example, this can happen if you take taxable money out of your pot(s) using the pension freedom rules. Another crucial aspect of a high-earner’s retirement plan is inheritance tax (IHT). In 2024-25, defined contribution pensions can be passed down to beneficiaries upon death without IHT. If you (the owner) die before age 75, the recipients of your pension funds can draw from it tax-free – although Although there are limits on certain lump sums. (After age 75, they may need to pay income tax on the withdrawals).

Invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585
info@casfin.co.uk