Who can invest in a pension?
Tax-relievable pension contributions can be made for an individual who is UK resident (or has been in the previous 5 years and has a UK pension), or who is either employed by the Crown or who is the spouse or civil partner of someone employed by the Crown.
Contributions into a pension can be made by the individual, an employer or a third party (ie a parent). There are no age limits, and pensions can be taken out for minors. However, in practical terms, it is not possible for someone over age 75 to make a personal contribution to a pension and receive tax relief on it (although their employer could, if applicable).
How much can an individual contribute to a pension?
Any individual under the age of 75 can make personal tax-relievable contributions of up to the level of their relevant UK earnings or £3,600pa gross if greater.
Contributions can be made on a regular basis, as lump sums, or as a combination. Regular contributions can usually be stopped, increased or decreased at any time.
In addition to the above limit on personal tax-relievable contributions, the maximum total contributions that can be made for an individual from all sources in a tax year without suffering a tax charge is the Annual Allowance (£40,000 gross in the 2019/2020 tax year). Contributions in excess of the Annual Allowance will be subject to an Income Tax charge based on the individual’s personal tax position.
This Annual Allowance is restricted by £1 for every £2 that an individual’s ‘Adjusted Income’ exceeds £150,000 (if their ‘threshold income’ exceeds £110,000). However, the Annual Allowance is not reduced further than £10,000.
It is possible to carry forward unused Annual Allowance from the previous three tax years assuming you had a pension plan in those years and provided you have not drawn any benefits flexibly from a Defined Contribution (money purchase) pension scheme.
When you have flexibly accessed a Money Purchase pension, the Money Purchase Annual Allowance will apply to future money purchase contributions. This is £4,000 in the 2019/2020 tax year.
If the total value of your pension benefits exceeds your Lifetime Allowance (£1,055,000 in 2019/2020) the excess will be subject to a tax charge of up to 55%. The Lifetime Allowance will increase each year in accordance with increases in CPI.
It is sometimes possible to elect for lifetime allowance protection for your pension funds, which can result in a higher Lifetime Allowance being applied. You should take advice as to whether protection is applicable to you.
To discuss your pension further please get in touch with a member of our team.