Pension Contributions over the Annual Allowance

KellySelby

I've had a client ask (through the adviser) if it would be possible to make contributions over the annual allowance without any tax relief so that they can potentially have a larger PCLS in the future. Has anyone seen this happen before?

At the moment, other than potential IHT savings, I can only think of reasons why you wouldn't do it or be able to do it, but wondered if it's something anyone else might have seen. Obviously among the reasons not to are the tax on benefits after the PCLS (without having relief on the way in), I'm not sure any providers would take the contribution anyway, and I'm sure other options would be more tax-efficient anyway, like using a bond.

Thanks

benjaminfabi

Hi

Providers definitely will accept it. A relief at source scheme will claim the 20% tax-relief and it will be for the taxpayer to declare the AA tax charge on their self-assessment.

There aren't many reasons to do it. If you think of it in terms of how tax is treated on the way in, whilst in, and on the way out:

• A pension is exempt, exempt, taxed (EET)
• A ISA, by contrast, is taxed, exempt, exempt (TEE)
• An offshore bond is taxed, exempt, taxed (TET)

When you create an AA tax charge on a pension you are in simple terms converting it to a TET structure. And, like the offshore bond, this T element isn't necessarily equal. For example:

• You might pay a lower overall rate of income tax in retirement than you pay in employment. The availability of the higher PCLS will affect this.
• You might be able to salary sacrifice on the way in and get an effective 45% relief at source and an NIC boost.
• You might be getting an employer contribution that you otherwise couldn't receive at all.
• You might never expect to draw on the pension and have a large IHT issue.

Then again, it might be better to take the taxed salary and look at other options. For example offshore/onshore bond, VCT or EIS (gaining tax-relief), or simple GIA/ISA. But you can't overlook the potential value (and simplicity) of tax-free compound growth on the tax-relief received by the pension, especially on a net pay scheme for a HRT/ART.

It's always likely to be better to take taxed income and fill up the ISA first (and spouse ISA), but thereafter it becomes very client specific.

les_cameron

Note, the AA applies whether or not you get tax relief.