Pensions Annual Allowance

Pensions Annual Allowance

The annual allowance is the maximum amount of ‘benefit’ or ‘total pension input’ that can build up from contributions during each ‘pension input period’ without incurring a tax charge. If the annual allowance is exceeded, an annual allowance charge is payable at your marginal rate/s of income tax i.e. 20%, 40% or 45%.

In 2010/11 the annual allowance was £255,000. However, it was reduced to £50,000 in 2011/12 and, on 6 April 2014, it was reduced to £40,000.

Tax yearAnnual allowance
2016/17£40,000
2015/16£40,000
2014/15£40,000
2013/14£50,000
2012/13£50,000

Carry forward rules

Even though the annual allowance for the current tax year is £40,000, you may be able to make additional contributions of up to £140,000 into your other pension under HMRC’s ‘carry forward’ rules.

These rules allow you to carry forward any unused annual allowance for the past three tax years – as long as you had a pension in place for each of the three years and your total contributions don’t exceed your current earnings.

Pension Input Periods

With effect from 6 April 2016, all pension input periods will be the same period as the tax year. Because this is not currently the case for some pension schemes, the tax year 2015/16 will act as a transition from each scheme’s current pension input period to the tax year. This transition will apply regardless of whether or not a pension scheme already uses tax years for its input period.

Total Pension Input

The total pension input is the amount of contribution that will be tested against the annual allowance. The total pension input is calculated according to the type of scheme to which your and/or your employer contributes.

Defined Contribution Schemes

The following elements are included in the total pension input:

  1. Any relievable pension contribution paid by you or someone else on your behalf.
  2. Any contribution paid on your behalf by your employer.

The tax relief is awarded at the time the contribution is made. The total pension input calculation will take place at the end of the pension input period, once all contributions have been made so that the total pension input can be entered onto your self-assessment tax return.

As a result of this, a calculation will be done to see whether an annual allowance tax charge is due.

Because the tax relief is awarded at the time the contribution is made, the ‘relievable pension contribution’ is taken into account when calculating the total pension input.

 

Equity Release Advice

Equity Release Advice

Why Is It Necessary To Take Advice About Equity Release?

Equity release schemes help you to access the value of your property in order to secure extra money for your retirement. These kind of plans are increasing in popularity because the entire process of securing a loan based on the money in your property is very easy.

Equity Release Advisers

Equity Release advisers are trained to help you understand all the advantages and disadvantages of different schemes. They must be qualified to give advice, and authorised by the Financial Conduct Authority.

Why Should You Opt For Equity Release?

If you are retired and are not planning to move into a long-term care facility, then an equity release plan can help secure your financial position if the correct advice is followed. All you need is your own house which is in a reasonably good condition and no mortgage or a very small amount outstanding.

The equity release schemes are usually of two types: lifetime mortgage and home reversion plans. Each of them provides you with the option of taking a lump sum amount or regular payments based on the value of your house. The money is paid to you tax free but you may be liable for income tax; and you may lose some of your state benefits – and this is why you should always take qualified advice from an adviser.

Lifetime mortgage schemes charge compounded rates of interest on the amount you have borrowed. You do not have to pay anything until you die or sell the house.

Home reversion plans give you the option of either selling your whole house, or a part of it, to a financial company – usually a specialist property company. Once there has been a transfer of ownership, you will receive the agreed amount of money. The home reversion company provides you with a lifetime lease and hence you can stay in the house by paying no rent or a nominal amount called a ‘peppercorn’ rent. When you move out to a long-term facility or in case of your death, the reversion company will sell the house and take their share from the sale proceeds.

Equity Release and Your Age

The higher your age, the higher the benefit you can enjoy from these plans. Your health condition also has an effect on the amount of money you can receive from the scheme; people with lower life expectancy gain more as the lending company has to tolerate less risk and can recover the money they have loaned more quickly.

Is Equity Release Plan Suitable For You?

The suitability of equity release plans varies from person to person because of different circumstances and monetary requirement of the individuals concerned.

If you opt for any of the equity release schemes then they ensure your financial security by giving you a steady flow of income or a lump sum amount without relinquishing your rights to continue living in your home.

However, there are a few caveats which your adviser has a duty to discuss with you when you are considering releasing money. When you are opting for any equity release plan, it may have an effect on the means-tested benefits which you get from the state. Sometimes it happens that your lender may give you an amount far less than the market value of the house.

It is necessary that you discuss the alternative options with your financial adviser and anybody who may benefit from the inheritance which you will leave after your death.