We took on a lawyer as a client recently; he is in his late 40s with, as is usual for a lawyer, no will in place and no pension planning. He is effectively self-employed as a partner of his firm and is an additional-rate taxpayer.
He wants to ‘manipulate’ his pension input periods to maximise scope for contributions. However, he has no pension at all, so manipulation is going to be tricky.
Simplicity is the key and because he has nothing in his pension pot this side of the end of the tax year means we have only one option.
We are going to take a contribution of a modest £20, which due to cashflow is all he can afford, into a pension scheme straightaway, meaning he technically owned a registered pension scheme in 2012/13.
The client was bemused by this because he has always been told a pension requires more funding than just £20 per year.
I explained that if in the following year he is going to be awash with cash, as seems quite probable, and as a result of his modest contribution he is eligible for the carry forward of the 2012/13 annual allowance, then he could make a gross contribution of £50,000 for 2013/14 and a further £50,000, minus the tiny contribution he’s already made.
The client will miss out on the 50%
tax relief but he will still be eligible for 45%, and he can put in twice the amount he thought he would be able to and, finally, get his pension plan up and running.
The net cost to fund those contributions fully is £27,500 in respect of the 2013/14 contribution and £27,486.25 in respect of the carry forward, and, finally, £12.50 in respect of the tiny contribution he can afford now.
Will the client have a chance to do some pension input period manipulation? We will come to that when necessary: probably 2015 if all goes well.
Alex Wild is an adviser at Plutus Wealth Management