In April 2016, the tapered annual tax allowance for pensions came into effect. Now if you weren’t paying attention, you might have missed this seemingly innocuous change. However, there are serious implications.
What does it do? It restricts the amount of tax relief those earning over £150,000 (including the value of pension contributions) are eligible to receive. All fine and well for people earning under that amount. However, people on higher incomes may well have to review their pension plans for the future.
In this article, we’ll go over some ways you could adjust to these changes.
Make the most of a SIPP
A self invested personal pension is particularly effective for people paying the higher rates of income tax. It offers great tax relief and a wide variety of investment options for your pension fund, meaning you can choose where your money goes. Therefore, you can invest in markets which you feel will be more lucrative and offer better returns.
If you are earning enough to pay the highest rate of income tax, you can benefit from a top up of 45% from the taxman, which makes these schemes extremely cost effective. You can also benefit from the help of an advisor in most instances, although this will likely incur a yearly fee.
Invest in Global Markets
Another option which you might like to consider is investing in global markets. Tying up money in various assets of your choosing may be seen as risky by some, but it could bring you decent returns for your money if your assets appreciate.
There are both safe and riskier options for investment, so it is worth researching which may be the best long term solution for your retirement fund. You can diversify with investments by investing in a wide range of different assets, which reduces overall risk and may be a safer option for long term investing.
Carry Forward Unused Allowances
Another way to combat the tapered tax relief is to carry forward any unused allowance from the last three tax years. If your annual tax allowance is £40,000, for instance, and you have contributed £20,000 for the last three years, then you could contribute £60,000 of unused allowance on top of another £40,000 as long as you have sufficient earnings (this final contribution decreases the higher your earnings over £150,000).
It could be worth seeking advice from a company like Bestinvest to get a greater understanding of how it works and how much you could potentially contribute.
Venture Capital Trusts
If all other options are exhausted, or if you are willing to take some risk with your money, you could consider a venture capital trust, which would involve investing money in a fairly new, risky business enterprise.
If the business becomes successful, then this could yield great returns on your investment, but if it is not then you could lose all your money. Therefore, it would be best to seek professional advice before choosing this option.
There are many creative ways you can find around the tapered tax allowance, most of which will involve finding another place to invest your money. Whilst most of these options carry a little more risk, they can nevertheless result in you taking home more money when you retire, so give them good consideration and choose one which works for you.