The Case for a Registered Pension Scheme

Oct 22, 2019 | Taxation, Tax Tuesday

Chairs on a Beach

The Case for a Registered Pension Scheme is our offering for this week. In our opinion, this is something which virtually all of us should take seriously (and invest more in), because the tax benefits of the UK’s approved pensions regime are, to be frank, outstanding.

There is so much to commend the approved pensions regime in UK as it stands in 2019. The tax reliefs which apply to it, and the flexibility of its use, mean that we have probably never been more positive about its role in our clients’ lifetime investment and tax planning, notwithstanding the financial limits which are involved.

Below is a summary of the considerable benefits. If you would like our more in-depth commentary on this, please send me an email.

  1. On contributions
    • Full tax relief accrues to contributions within the specified limits;
    • Member contributions are powerful in managing marginal rate tax exposures (higher rate Income Tax relief, even 60% relief at incomes above £100,000) and in retaining Child Benefit (at incomes above £50,000);
    • Employer contributions avoid all National Insurance costs (so “salary sacrifice” arrangements continue to be popular) and fit brilliantly with a company owner’s preferred method of profit extraction;
    • We typically enjoy tax relief at our highest lifetime marginal rates of tax but pay tax in retirement (on what comes out) at a significantly lower marginal rates – a very good differential in our favour!
  2. On growth in the fund
    • Full exemption from tax applies to all income and gains accruing to the fund – gross monies reinvested for more gross returns are difficult to beat;
    • The lifetime cap on tax-advantaged funds in our pension stands at £1,055,000, increasing annually by inflation – within this limit, a pension is capable of being an important part of every individual’s wealth portfolio.
  3. On benefits drawn
    • Exemption from Income Tax applies to 25% of the fund built up and paid out as a lump sum (the “pension commencement lump sum”) – this is thick icing on an already attractive cake;
    • Thereafter, Income Tax is payable on sums drawn by way of pension, at our marginal rates – often at lower marginal rates in retirement, as noted above;
    • Full exemption from Inheritance Tax also applies to pension pots left to beneficiaries at death – so pensions have become important IHT planning tools, often the last monies we might choose to draw on, in actual fact;
    • Post-death pension pots drawn by beneficiaries are then completely free of Income Tax where the death was before age 75 or taxable at marginal rates where the death was after that birthday – at worst, a highly flexible place for the dependants.

Our clients should be in no doubt about the wide and valuable range of tax advantages associated with utilising their approved pension capacities. There are benefits at all stages – just how much benefit is achieved comes down to intelligent planning. Please speak to us if you are interested in exploring or enhancing your use of this favourable regime, or email if you would like our more in-depth commentary.