“The annual allowance is frequently misunderstood, but the complication of the tapered annual allowance is a mystery for many pension savers, and even experienced investors,” he said.
Price made the comments in light of Pensions Awareness Day on Friday.
Currently set at £40,000 ($53,195, €44,726) for many higher rate taxpayers, the annual allowance restricts the tax-free amount that can be put into a pension each year.
New rules introduced in 2016, however, mean that the annual allowance reduced by £1 for every £2 earned over £150,000, “dropping to a hard floor of £10,000 for those earning more than £210,000 a year”, Price said. .
“The calculations that determine whether you are affected by the taper are best left to a financial adviser or accountant; those going without advice can easily make the wrong assumptions and they run a greater risk of incurring a tax charge,” he cautioned.
Lifetime Allowance (LTA)
The maximum amount that can be built up in a pension was set at £1.8m in 2011/12, including the value of any defined benefit schemes.
Successive cuts, however, “have continued to trap many savers”, Price said.
“Anything over the LTA is taxed at up to 55% when you take the excess as a lump sum and at 25% on top of your marginal rate of tax when you take it as income. The reduction in the LTA from £1.25m to £1m in April last year left thousands more individuals potentially within its grasp.
“With this reduction to £1m, more people will have to look at alternative options to fund their retirement. If they’re going to exceed the lifetime allowance, then it makes sense to firstly stop paying into a pension.”
Doing the sums
Price recommended that people work out how much income they are going to need in retirement before calculating any shortfall between this amount and what is realistically achievable from their pension fund.
“To fund any shortfall, alternative investments will need to be assessed. With the annual limit now set at £20,000, individual savings accounts (ISAs) can be a useful vehicle to help recover this ground.
“The key to all of this is advice to help understand exactly what you want and need at retirement, and then to determine the most appropriate investment strategy to get there,” he said.
