Do you have clients who might want to take advantage of the proposed “pension flexibility” rules, but who may also wish to benefit from the current rules on how much can be invested into their pension tax efficiently? Perhaps they would like to keep their options open, not knowing at this stage whether they will need to be taking a lot out or putting a lot in.
As I am sure you are aware, the current annual maximum pension contribution which will attract tax relief is £40,000. Considerably more than this can be invested tax efficiently by using carry forward allowance. For example if a client has not made any recent pension investments in 2014/15 the maximum would be £180,000, going down to £170,000 in 2015/16 and £160,000 thereafter (assuming no changes in the annual allowance). The reason for the differences is the changes that have been enacted each year in the annual allowance, and when you are using carry forward rules you need to look at the allowance that applied in the year from which you are carrying forward.
If, however, a client takes advantage of “pension freedom” rules in April or beyond the annual maximum contribution goes down to £10,000, with no carry forward allowed. This is a massive difference!
Imagine you have a client who decides to take advantage of the new rules and starts taking cash withdrawals from his pension. Then his circumstances change radically and he realizes he can now afford to make a large pension contribution. Let’s assume for this purpose that this all happens in the 2015/16 year. Imagine his shock when he discovers that instead of being able to invest £170,000 and gain tax relief he can now only invest £10,000, all because he took a few thousand pounds out under the new rules and hadn’t been told how that would affect future funding ability. Do you sense an impending complaint here?
Did you know that, at least under the current proposals, there is a way such a client can have his cake and eat it? The answer is for him to start taking capped drawdown now, even if he doesn’t yet need to do so, rather than waiting until April and using the new rules. Once the new rules are in place he can then continue taking money from his pension and, as long as he continues following the old capped drawdown rules, this will not be classed as using the new “pension freedom” rules – which means he can use the current annual allowance rules, including carry forward, if he wishes to invest more into his pension.
I think we therefore have a duty to let clients aged 55 or over know that they can “lock in” the current annual allowance rules in this way, but only if they act fast. They will need to set up a capped drawdown arrangement right now, so that it is in place before the new rules apply.
We would not be suggesting this to our clients as some kind of dodgy tax avoidance scheme, but simply ensuring they had the opportunity to maximum fund their pensions if their circumstances changed.
Knowledge is power. Make sure you empower your clients by giving them the knowledge they need to maintain the utmost flexibility in their financial affairs!