After a year of enormous change in the pensions industry it looks like 2016 will bring even more upheaval. Here’s what you need to know.
Lifetime allowance reduction
One of the biggest changes is that from April 2016 the lifetime allowance for pensions will reduce from £1.25 million to £1 million. Any savings above this limit will lose tax relief and will be hit with a 55% tax rate when they’re eventually withdrawn.
If you think your savings will exceed the limit you might want to consider withdrawing money as early as possible – namely age 55.
Annual allowance taper
Higher earners should think about making additional pension funding ahead of the tax year end, as an annual allowance taper is being introduced from 6 April.
If you have an income of more than £150,000 your annual allowance for that year will be restricted. The change will potentially reduce higher earners’ maximum contributions to £10,000.
Pension tax relief
The March Budget is expected to include a review of pension taxation, the possible abolition or reform of pension tax relief and measures to help investors facing exit penalties access the pension freedoms.
The new state pension will launch on 6 April and we’ll also see the end of contracting out for final salary pension schemes.
New Year resolutions
Tom McPhail, head of retirement policy at Hargreaves Lansdown, has drawn up a list of 10 New Year resolutions which investors should consider adopting:
- Contact your pension providers and get a private pension forecast. If you’re not on target for an income you’ll be happy with, look at what you can do to change it. Options include increasing contributions, retiring later and making changes to your existing arrangements.
- Get a state pension forecast. There are changes to the state pension happening this year so it is a good moment to look at what you can expect your National Insurance contributions to buy for you.
- Review your pension investment choices, especially if you have been auto-enrolled into a default fund. Most default funds will not be the best strategy for each individual.
- If you are eligible for a workplace pension and you haven’t already joined, then look at doing so; it is free money from your employer.
- Review your pension charges. Pension products have been constantly evolving; even if it was right for you when you started it, it may not be the best choice now. The government is looking at ways to make it easier and cheaper to move your pension.
- Check whether you’ll be affected by impending and potential tax changes. If you’re a higher earner it may well make sense to make additional pension funding ahead of the tax year end.
- Check whether you should use the Carry Forward rule to sweep up unused pension contribution allowance from previous years ahead of the pension tax review being published.
- Make sure you’ve notified your pension provider about your wishes for any pension death benefit payments.
- Check whether you’ll be affected by the drop in the lifetime allowance. This could affect your capacity to make further pension contributions after April 2016.
- Look out for the forthcoming pension freedoms exit penalty review; it may present an opportunity to make a penalty free move from a dormant pension.