I'm saving into a self-invested personal pension (SIPP) and heard that the Government is going to stop paying a top-up to it. What’s going on and what should I do?
The Government is planning to make some potentially significant changes to this incentive to save for retirement, which could affect almost everyone with a pension.
Let’s start with the basics.
You’ve got a SIPP, which is a type of private pension that allows you to save towards your retirement and gives you more control over where your savings are invested. And just like any other pension, your money grows free of any further income tax and free of capital gains tax.
Under the current rules, you can pay up to 100% of what you’ve earned in a year into a SIPP, up to a maximum of £40,000. And the total amount you can hold across all of your pensions tax free – known as the ‘lifetime allowance’ – is currently £1.25 million.
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How tax relief currently works
As a ‘thank-you’ for saving towards your own retirement, the Government tops up every contribution you make to your SIPP, via tax relief.
With each contribution, the Government adds 20% to your pension. Put £80 in a month, say, and your SIPP provider will claim an extra £20 from the taxman, meaning you get £100 in your pension.
Higher-rate taxpayers (those earning between £42,385 and £150,000) get an extra 20% tax relief. This won’t be added to your pension, but will instead be deducted from your overall tax bill for the year, and you can claim it through either a Self-Assessment Tax Return or by writing to your tax office.
Additional-rate taxpayers – those earning more than £150,000 – can claim an extra 25%. For a higher-rate taxpayer, a £100 saving into your pension actually costs you only £60 – you get £20 added by the Government and £20 back in tax relief. For additional-rate payers, it costs only £55.
How to review your pensions.
So, what’s changing?
From April 2016, the lifetime allowance falls from £1.25 million to £1 million. If you end up with more than £1 million in your pension, you’ll have to pay a tax charge on the excess when you take it out – either 25% if you take it as an income, or 55% if you take it as a lump sum.
People earning more than £150,000 will also see the annual amount they can contribute to a pension reduce, by £1 for every £2 you earn over £150,000. When income hits £210,000, you’ll be able to contribute a maximum of only £10,000 pa to your pension.
That’s what we do know. But last year, the Government indicated that it wanted to make some more significant changes to pension tax relief.
It’s considering a number of options – including creating a flat amount that’s paid to everyone, no matter how much you earn, or a more radical removal of pension tax relief altogether, and instead making all withdrawals from your pension in the future tax free, similar to an ISA.
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What should you do?
Higher-rate taxpayers might want to think about investing more in their pension to take advantage of higher tax relief before it changes. If you have any allowance left over from the past three years that you haven’t used, you can place it all into your pension – a maximum of £140,000.
Saga Investment Services offers a great SIPP that can help you plan your pension as you head towards retirement. It allows you to take advantage of the tax relief on offer for pension contributions and consolidate* older pensions into one place.
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Have a question?
If you have any questions about SIPPs, ISAs or other investments, our friendly team of experts are here to help you. You can call them on 0800 033 4000.
Our team at Saga Investment Services are experts in investments and financial planning and can answer questions on these subjects only.
Saga Investment Services has created a special guide to SIPPs, with everything explained in plain English. Download it at sagainvestments.co.uk/sippguide
IMPORTANT INFORMATION Capital at risk. This article is not advice. Past performance is not a guide to future performance. Tax rules depend on your circumstances and can change. Please note we do not provide tax advice. If you are unsure whether an investment is suitable, please contact your adviser. SIPPs aren’t right for everyone. You should regularly review your SIPP investments, or seek advice, to make sure they still meet your needs. Deciding to access your pension is important, and could affect your income in future. Seek professional advice before accessing your pension, or visit Pension Wise (pensionwise.gov.uk). Saga Investment Services Ltd is an Appointed Representative of Bestinvest (Brokers) Ltd, which is authorised and regulated by the Financial Conduct Authority (Reg. No. 2830297). Bestinvest (Brokers) Limited is part of the Tilney Bestinvest Group of Companies. 6 Chesterfield Gardens, Mayfair, London, W1J 5BQ. Saga Investment Services Limited (Reg. No. 09308423) has registered offices at Enbrook Park, Sandgate, Folkestone, Kent CT20 3SE.
*Before consolidating, make yourself aware of any benefits or penalties of transferring or consolidating your pensions.