Most of the pension related headlines following the pre-budget report (PBR) surrounded the freezing of the annual and lifetime allowances. However, beneath the surface, there were a number of other changes which have an indirect impact on pension provision. Some of these aren't necessarily straightforward, but give an ideal opportunity for advisers to show the need for, and usefulness of, financial advice.
The ability to temporarily carry back losses for up to three years could prove helpful in unlocking tax already paid on previous profits. Under current rules, businesses can carry back unlimited trading losses to the previous financial year. The new temporary rules allow businesses to carry back up to an extra £50,000 in losses to be offset against profits in the two preceding years.
It is first necessary to create a loss in the current year, but this can be deliberately achieved by paying in a company pension contribution. This loss can then be offset against profits in previous years, allowing the company to claim a refund of tax already paid. However, the new rules only apply to accounting periods ending between 24 November 2008 and 23 November 2009, so there is a limited window to take advantage of this opportunity.
As anticipated, the PBR also confirmed the upper earnings limit for national insurance (NI) will increase at a faster rate so that it catches up with the threshold at which higher rate tax starts. This means that those earning above £43,888 will pay 11% rather than 1% NI on an extra £3,588 from April 2009. This will make pension provision using salary sacrifice a more attractive route for higher paid employees. And the salary sacrifice option will be further enhanced in 2011 when the half per cent increase to all NI rates, for both employers and employees, is introduced.
Another buy now opportunity exists for those people who won't get the full basic state pension due to incomplete national insurance records. To qualify for a full basic state pension, women need to have paid NI for 39 years, men for 44 years. This is reducing to 30 years, for both, for those retiring after 2010.
People who have an incomplete record can fill in the gaps by paying class three national insurance contributions. The cost of buying an additional year of basic state pension currently costs £421.20 a year. The extra benefit gained by this payment varies due to the complexities of our state benefits system, but the person will receive an additional inflation-linked pension of £94.33 or £141.49 each year. So, in simple terms, if someone lives three or four years in retirement they will receive value for money. Given that people can easily live for 25 years in retirement this is a fantastic deal.
Hidden within the PBR was news that the price of class three NI is increasing to £626.60 per year after April 2009, a rise of 48.7%. Buying back will still look attractive even after this increase, but people who are going to fall short of a full basic state pension should seriously consider acting sooner rather than later. But bear in mind that this won't be suitable for everyone, for example those people retiring after 2010 who will have 30 qualifying years or those who will be entitled to pension credit because their income is low.
It is clear the Government's agenda within the PBR was to increase spending, at least in the short-term, rather than encourage saving. But for those clients who want to save more - and given the current financial situation this may appeal to many - there are additional tax advantageous opportunities.
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