As the fallout from George Osborne’s Budget earlier this month continues, SIPP (Self-Invested Personal Pension) investors could be forgiven for thinking that there are no impending changes which will affect you.
Think again!
The Budget introduced a number of changes which will affect SIPP investors. These come on top of other rule changes, which makes now the perfect time to round up all the imminent amendments to pension rules.
However, let’s start with two things which aren’t changing.
Tax-relief
Despite huge speculation before the Budget, one thing which isn’t changing is the headline rate of tax-relief on pension contributions.
Responding to criticism before the Budget, the Treasury took the unusual step of confirming that the current system of tax-relief will remain unchanged, at least for the short term.
The Budget did however see the introduction of the Lifetime ISA, which many experts believe is the precursor to a Pension ISA, which will eventually see up front tax-relief cut.
Time will tell if this is the case, but many people believe the days of large up front tax-relief on pension contributions could be numbered.
Tax-free lump sum
George Osborne confirmed that he has no plans to abolish the tax-free lump sum of up to 25% of the value of a pension, which it is currently available from the age of 55.
Stamp duty on commercial property
Many SIPP investors hold commercial property; indeed, it is a very popular option amongst business owners.
The Budget introduced changes to the way Stamp Duty is charged on commercial property purchases, moving it to a ‘sliced’ based system, as follows:
- Up to £150,000: 0%
- £150,001 to £250,000: 2%
- Over £250,000: 5%
The change will leave the majority of commercial property investors better off. For example, the Stamp Duty payable on the purchase of a commercial property for £200,000 will fall by £1,000 and by £4,5000 on a £300,000 purchase price.
Lifetime Allowance
The Lifetime Allowance is the maximum that an individual can hold in their pension before additional tax charges become payable.
When it was introduced the allowance was initially set at £1.8 million. Over the past few years this has been cut by successive Governments and it has been confirmed that a further reduction will be made, to £1 million, from 6th April 2016.
Those people affected by the cut can apply for protection against the change and have two options:
- Individual Protection 16 (IP16)
- Fixed Protection 16 (FP16)
These are complex arrangements each with advantages and disadvantages. If your pension pot is close to the new limit, or may be in the future, you should contact us to discuss your options.
Remember too, if you are many years from retirement, even a pension with a relatively low current value, could be affected by the new, lower, Lifetime Allowance.
Tapering of the Annual Allowance
The Annual Allowance is the maximum you can pay into a pension each year and receive tax-relief.
It is currently set at the £40,000 (when it was introduced in 2006 it was £215,000!) or 100% of your earnings, whichever is lower.
Any contributions over this amount won’t qualify for tax-relief and will result in an additional charge being paid.
From 6th April 2016, higher earners, who are more likely to be SIPP investors, will see their Annual Allowance cut, significantly reducing the amount they can pay into their pension. This will work as follows:
- For every £2 of ‘adjusted income’ over £150,000, the Annual Allowance will reduce by £1
- ‘Adjusted income’ is defined as all taxable income, including salary, dividends, rental income and, somewhat controversially, employer pension contributions
- The maximum the Annual Allowance can be reduced to is £10,000
Again, this is another complex change and care needs to be taken if higher earners are not to be caught out.
We’re here to help
The changes to pension rules are generally aimed at those with larger funds and / or higher earners, who are more likely to use a SIPP.
Whilst some are positive, for example we welcome the changes to Stamp Duty and the news that tax-relief won’t be changed, at least for the short term, others could leave you significantly worse off.
If you would like to learn ore about the changes to pensions, or receive advice on your specific circumstances, we are here to help.
Call Bev or Sarah on 0115 933 8433 or email info@investmentsense.co.uk
