Most investors who have lowered their contributions or fund value target will have made alternative arrangements for their retirement, but it’s worth considering the circumstances in which exceeding the allowances could still be beneficial.
For example, consider an investor who is already close to the lifetime allowance, and whose company offers employer contributions, but no alternative benefit.
While the contributions will take the fund value above the lifetime allowance, the investor will still be in a better position than if they had refused the contributions altogether.
Annual allowance
With the annual allowance, it’s all too easy to forget about tax relief when considering the annual allowance charge. Entitlement to tax relief is based on an individual’s relevant UK earnings, regardless of the annual allowance.
The charge takes back tax relief given to contributions above the annual allowance. In effect, contributions above this are paid net of income tax. In other words, they’re in the same position as if they’d been placed into practically any other savings vehicle.
Of course, investors who have used their annual allowance have other tax-efficient options, but pensions still have a number of features that could make them worthy of consideration for their extra savings:
• Investments grow free of tax and exempt from capital gains tax,
• A wider range of investment options than some other savings vehicles, such as Isas,
• Investors cannot normally access benefits until age 55, so the savings are ring-fenced from being spent too soon,
• The funds are normally held outside the investor’s estate,
• There are a number of tax-efficient options for beneficiaries on death.
Retirement needs
Pensions are long-term savings vehicles, and it can be hugely frustrating that the legislation governing them keeps changing so significantly.
After all, hidden somewhere behind this whirlwind of changing rules are real investors, with real needs for their retirements. These needs may change as time passes, but are still likely to be more stable than tax rules.
The nature of the annual and lifetime allowances has undoubtedly shifted since their introduction 10 years ago, and it’s questionable how much longer either will last in its current form.
For the moment, all everyone can do is consider them as features of a savings product, and try not to let them interfere with an investor’s long-term goals.
Jessica List is pensions technical analyst at Suffolk Life
