Pension planning no longer just a year-end exercise

FENELLA MARTIN-REDMAN of Baker Tilly warns of potential traps for the unwary within the latest changes on pension contributions and reliefs

PENSION planning, for so long a task that would be left until the end of the tax year approached, was thrown into disarray by the last government.

But aren’t the waters calm again? Well, no, actually. There are still traps for the unwary to fall into.

Since April 6, it has been possible to increase pension contributions qualifying for Income Tax relief by using unused relief brought forward from earlier years. But there are catches to look out for.

Unused relief is only available to bring forward from a year in which you were a member of a registered pension scheme.

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It does seem unfair that a person who has no pension track record cannot make up the deficiency now, even though another person who may have made no contributions for years but is a member of a registered scheme can get the benefit of unused relief.

Relief is not measured according to payments in a tax year but pension input periods that end in the year (the pension input period, or PIP, may be different from scheme to scheme and there are many whose PIP-end falls on April 6, and has therefore already passed).

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So, adding up pension contributions for this year, payments made in the year-ended April 5, 2011, may already have been sufficient to use up this year’s allowance.

Contributors should not rush to maximise contributions this year but should consider the rate at which they will get tax relief.

Members of defined benefit (DB) schemes may be worried that they may be denied the luxury of planning if they have to wait until the end of the year to know what their final salary, plus the effects of promotions and bonuses will be.

However, this is precisely the area where advance planning can pay off. A DB scheme member who expects to encounter problems of over-funding can take steps to address the issue by changing the terms of their employment to remove the risk of over-contribution.

They need to decide if the tax penalty on over contribution or over-funding is likely to be compensated for by accumulation of a greater pension pot, albeit one that then risks being taxed more highly if the lifetime allowance will be breached by the time the pension comes to be drawn.

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