A 60-year-old single client with no dependants and annual earnings of around £100,000 wanted us to review his current pension arrangements and advise him on an inheritance.
His current pensions were valued at around £400,000. He was not sure if this would provide him with enough income to maintain his current standard of living.
His mother had recently died and left him an inheritance of £100,000. He had no outstanding mortgage or debts, and had sufficient income. As he did not immediately need the income or the capital, we advised him to use this inheritance to increase his pension pot.
For this tax year, the maximum annual allowance for pensions eligible for tax relief is £50,000 (it will reduce to £40,000 next tax year).
We advised him to use carry-forward to contribute over £50,000 this tax year and still remain eligible for tax relief on the whole amount.
Over the past three years he had contributed £24,000 to his pensions, so he had unused allowance of three lots of £26,000 from the previous three tax years.
Therefore, if he did the same this year out of his normal income, he would have an additional £26,000 to contribute, equalling £50,000.
This allowed him to contribute a total of £128,000, equal to the sum of the unused allowance of the current tax year and the previous three years’ unused allowance.
As a higher rate tax payer, the client received additional tax relief via his tax return of 20% as well as the basic rate tax relief of 20% through his pension provider, making it a total of 40%.
It is important to remember the pension input period (PIP) date is critical in determining the pension input amount and the tax year which it is set against. This is also crucial when considering carry-forward.
We also consolidated all the client’s pensions into one Sipp on our in-house platform. This means that when he decides to retire, he will be able to use income drawdown from his Sipp and take 25% of his pension fund as a tax-free lump sum.
Kate Banham is associate partner at Wilcocks & Associates.