Up until recently you would have been forgiven for thinking that pension planning was all about maximising tax breaks for highly paid executives and company directors. However, the December 2009 pre Budget report finally confirmed that the government was going to put the squeeze on tax benefits enjoyed by the executive classes. From April 6th 2011 those paying the top rate of tax will see the relief on their contributions taper from 40% at £150,000 to 20% for those earning more than £180,000. It doesn’t get any better with the new coalition Government’s pledge to review contribution levels so that whereas an individual can currently enjoy relief on contributions up to 100% of salary with a cap at £245,000 the maximum contribution level for tax relief might be capped at £30,000. So we could be looking at the difference between someone investing £245,000 into their pension fund at a net personal cost of £147,000 (with 40% relief) to possibly investing £245,000 at a net cost of £230,000 (50% relief on £30,000).
Whatever happens over the next twelve months employers will be forced to find new, innovative and tax efficient ways of remunerating staff affected by the reduction of tax relief coupled with the 50% tax on earnings over £150,000 and the loss of personal allowances. This is a triple blow for high earners and will hit not only company directors and senior executives but also doctors, dentists, lawyers and accountants.
The alternatives fall into three main areas, pay more cash, set up an alternative benefit plan such as an employer funded retirement benefit scheme (EFRBS) or pay more in shares and share incentives.
Cash is not a tax efficient way of rewarding staff, the employer suffers national insurance on the payment and the employee pays national insurance and income tax so this is not a very satisfactory solution.
Rather than cash other options seem much more appealing such as EFRBS and share schemes but in addition investment bonds, maximum investment plans, Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) are possible alternatives. For those who work abroad or who are likely to become non resident in the future a Qualifying Recognised Overseas Pension Scheme (QROPS) may be the answer. These have become increasingly popular for high earners since pensions simplification.
With less than a year before the new rules come into play it is essential to start looking at the alternatives NOW. As ever there is no simple fits all solution. Much depends on risk profile, current composition of benefits and future plans. What is certain is that almost unlimited tax relief through a self invested personal pension is now almost consigned to history.
Fiduciary Wealth are experts at finding the right solution to suit your individual circumstances whether employer or employee. Working with your existing advisers we can help solve the pensions dilemma that you are about to face. Not only can we resolve your issues in respect of UK pension planning we can also help dovetail these with your overall situation be that in the UK or offshore.
Can you really afford not to maximise your retirement benefits for yourself and your dependents?