High earners do not have much time left to make the most of their pensions.
The government is introducing two changes I April 2016 that will slash the size of pension funds and the amount of money the wealthy can contribute to a pension.
The lifetime allowance has already dropped from £1.8 million in April 2006 to £1.25 million this tax year. In April another slice is lopped off reducing the allowance to £1 million.
If retirement savings in a pension go over the lifetime allowance, the balance is savagely taxed.
How much a rich worker can save in a pension each year also changes in April 2016.
The limit is £40,000 this year. From next year, the relief is tapered away for anyone earning between £150,000 and £210,000 or more.
Contribution limits reduced
Between those wage limits, the annual allowance reduces by 50p for every £1 earned until those earning £210,000 or more can only pay £10,000 at most into a pension.
Acting now means top earners can carry forward to top up recent years when they made less than maximum contribution in recent years.
For example, if total pension contributions were less than £50,000 in 2013-14, and less than £40,000 a year in 2014-15 and 2015-16, carry forward allows the difference between what was paid and £130,000 as a contribution.
However, in April 2016, the relief steps forward a year and the last year of £50,000 of allowable contributions is lost, reducing the overall amount someone earning £210,000 or more can pay in to their pension to £90,000.
Someone earning £210,000 would pay additional rate tax, so their pension contributions would also attract tax relief at 45%. – adding £58,500 to a maximum £130,000 contribution before April 5, 2016.
Deliberate ploy against wealthy
A report from the TUC claims high earners are taking taxable extra cash as well as making pension contributions.
Analysing accounts of from FTSE100 companies, the TUC claims cash payments of an average £152,906 or 29% of salary were made to 316 executives.
The unions are concerned that if pension rules are leading high earning bosses to shun pensions, then they may not promote pension saving for retirement well to their employees.
Law firm Pinsent Masons believes this is a deliberate ploy by the government to make pensions less attractive to high earners.
“The government gains from this because the extra money the executives receive is taxable, whereas the cash going in to a pension means the Treasury has to top up the contribution with some cash,” said spokesman Simon Tyler.
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