

17
Tax relief on personal pensions
Premiums on personal pension policies are payable net of
basic rate tax relief at source, with any appropriate higher or
additional rate relief usually being claimed via the PAYE code or
self assessment Tax Return.
Case Study
Francesca will earn £60,000 in 2018/19. She will invest
£12,500 into her personal pension policy. She is entitled to
the basic personal allowance and has no other income.
Francesca will pay her pension provider a premium, net of
basic rate tax relief of £10,000. She is also entitled to higher
rate tax relief on the gross premium, amounting to £2,500.
As Francesca is an employee, we can ask HMRC to give the
relief through her PAYE code. Otherwise, we would claim in
Francesca’s 2019 Tax Return. Thus the net cost to Francesca
of a £12,500 contribution to her pension policy is just £7,500.
With new income tax rates being introduced in Scotland, this
issue is more complicated for Scottish taxpayers. Contact us for
specific advice.
The lifetime allowance
Where total pension savings exceed the £1,030,000 lifetime
allowance at retirement (and fixed, primary or enhanced
protection is not available) a tax charge arises:
Tax charge
(excess paid as annuity)
Tax charge
(excess paid as lump sum)
25% on excess value, then up
to 45% on annuity
55% on excess value
The lifetime allowance will increase each year in line with CPI.
Accessing your personal pension fund
Taxpayers have the option of taking a tax-free lump sum of
25% of the fund value and purchasing an annuity with the
remaining fund, or opting for income drawdown which offers
further flexibility in how the fund is used.
An annuity is taxable income in the year of receipt. Similarly any
monies received from the income drawdown fund are taxable
income in the year of receipt.
Taxpayers have total freedom to access a pension fund from
the age of 55. Access to the fund may be achieved in one of
two ways:
• allocation of a pension fund (or part of a pension fund) into
a 'flexi-access drawdown account' from which any amount
can be taken, over whatever period the person decides
• taking a single or series of lump sums from a pension fund
(known as an 'uncrystallised funds pension lump sum').
When an allocation of funds into a flexi-access account is made
the member typically will take the opportunity of taking a
tax-free lump sum from the fund.
The person will then decide how much or how little to take from
the flexi-access account. Any amounts that are taken will count
as taxable income in the year of receipt.
Access to some or all of a pension fund without first allocating
to a flexi-access account can be achieved by taking an
uncrystallised funds pension lump sum. The tax effect will be:
• 25% is tax-free
• the remainder is taxable as income.
Money Purchase Annual Allowance
The government is alive to the possibility of people taking
advantage of the flexibilities by 'recycling' their earned income
into pensions and then immediately taking out amounts from
their pension funds. The MPAA sets the maximum amount of
tax-efficient contributions an individual can make in certain
scenarios. The allowance is set at £4,000 per annum, with no
carry forward of the allowance to a later year if not used in the
year.
The main scenarios in which the reduced annual allowance is
triggered are if:
• any income is taken from a flexi-access drawdown account,
or
• an uncrystallised funds pension lump sum is received.
However just taking a tax-free lump sum when funds are
transferred into a flexi-access account will not trigger the
MPAA rule.
Your next steps: contact us to discuss…
•
Calculating how much you need to save to ensure
you enjoy a comfortable retirement
•
Tax-advantaged saving for your pension
•
Saving in parallel to provide more readily accessible
funds
•
Saving in employer and personal pension schemes
•
Using your business to help fund your retirement