You might be beginning to get bored of reading articles about pensions. All I can say on this is that it really isn’t our fault. We’d like pensions to be simple and dull just as much as we think you would.
But the nation’s politicians aren’t with us on this.
They want the rules around pensions to keep changing – all the better to extract cash from them, we suppose.
So, only a matter of a month or so before Chancellor George Osborne’s great pension freedoms hit the market, Labour leader Ed Miliband waded in. His plans, should we be unlucky enough to be ruled by him later this year, are as follows.
The annual allowance – the amount one can save into a pension every year – is to fall to £30,000. The lifetime allowance (LTA) – the amount you can have in your pension in total on your retirement without paying punitive tax rates at 55% – will fall to £1m. And anyone earning over £150,000 will lose their full income tax relief: instead of 45% relief, they will only get 20% relief.
You might think this is no big deal. After all, £30,000, £1m and £150,000 all sound like big numbers – so not that many people will be affected. It isn’t so.
Anyone expecting a final-salary pension of more than £50,000 will find themselves paying extra tax, for example (final-salary pensions are valued at 20 times payout for LTA purposes), and anyone relatively young and saving regularly into a pension may well find the same.
If you have £300,000 in a scheme at age 35 and add nothing more, it only has to compound at 5% a year to be worth more than £1m in nominal terms when you hit 60.
So what should you do? If you are in danger of hitting the LTA, perhaps don’t add more money. Any sensible government would immediately remove the LTA (so as not to penalise good investors).
But we don’t get those often. If you are not in danger of hitting the LTA, and you are a high earner, consider the opposite. The current annual allowance is £40,000. But if you have more than that knocking around (or are prepared to sacrifice salary), you can carry forward any unused allowance for three years.
The allowance was £50,000, so that makes the total allowance for this year and the preceding three £190,000 – as long has your salary is this high (you can’t get tax relief on more than you earn).
There’s also a month of the next tax year between 6 April and 7 May, so if you are cash-rich and near retirement you can chuck in an extra £40,000 then too. Then, once you hit retirement age, I’d take your 25% tax-free lump sum as soon as you can: it’s just too tempting a target for our greedy governments. They won’t be able to resist cutting it for much longer.