If you’re thinking about making a sizeable pension contribution in the near future, do yourself a favour and review your Annual Allowance limit now, before it may be too late!
Evidence Suggests That Reducing Annual Allowance Is A Quick And Easy Way For The Chancellor To Raise Tax Revenue From Those Most Able To Pay It
Annual Allowance Has Had A Rough Ride In Recent Years
Following ‘pension simplification’ day on 6 April 2006, Annual Allowance enjoyed a few years of regular increases. But a bombshell was dropped in the 2011-2012 tax year when it was slashed by around 80 per cent.
It’s been reduced since. And if you’re a high earner or if you’re drawing income from your pension and still making contributions, your Annual Allowance is now a tiny fraction of where it was in 2006.
The Recent History Of Annual Allowance
It won’t surprise you to learn that many people in the pensions industry believe Annual Allowance could come under further attack in the Budget later this year.
After all, it really only affects affluent people who make larger pension contributions. As a result, reducing Annual Allowance could be a politically positive message, should the Chancellor wish to demonstrate he’s removing tax breaks for the rich, in favour of generating revenue for everyone.
Here is HMRC’s information on Annual Allowance.
Maximise Your Annual Allowance With Carry Forward
If you’re considering making the most of the current Annual Allowance rules to contribute a large sum into your pension, it’s worth knowing that the Carry Forward rules still apply.
Essentially, this could allow you to Carry Forward unused Annual Allowance from the three previous tax years, enabling you to catch up on contributions you may have missed.
There Are Two Conditions For Cary Forward
1. You must have been a member of a UK-registered pension scheme (this does not include the State Pension) in each of the tax years from which you wish to Carry Forward. Membership of any registered pension scheme can qualify, even if you didn’t make contributions or you were already taking benefits.
2. You must earn at least the amount you wish to contribute in total this tax year (unless your employer is making the contribution).
Needless to say, it can be quite a complex area. Here’s a technical summary from a SIPP and SSAS provider on the Carry Forward of Annual Allowance.
Annual Allowance and Carry Forward Calculator
Here’s a useful Annual Allowance and Carry Forward calculator. There’s also a helpful factsheet there covering both Carry Forward and Annual Allowance in more detail.
How To Secure Tax Relief On A Contribution Of Up To £500,000
It really is possible to make such a large contribution on which tax relief could be available. It applies to businesses funding a SSAS. Annual Allowance limits apply, but if it’s tax relief you’re after, this article is worth a read.
Don’t Forget To Review Your Annual Allowance Entitlement
If you’re contemplating a pension contribution at some point soon, check out the links above to see how Annual Allowance and Carry Forward apply to you.
When it comes to Annual Allowance, it may not be a case of ‘buy now whilst stocks last’.
Though you never know!
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Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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