GETTING THE MOST FROM YOUR PENSION SAVINGS

Transcription

1 GETTING THE MOST FROM YOUR PENSION SAVINGS

2 2 Getting the most from your pension savings CONTENTS 04 Two types of pension 05 Tax and your pension An overview 05 Who can pay into a pension? 05 How does tax relief work? 06 Can I pay as much as I want into a pension? 09 What if I contribute more than I can claim tax relief on? 09 Can contributing to my pension help me make savings elsewhere? 10 When I want to access my pension, what taxes will I pay? 11 Your Annual Allowance 11 What is the Annual Allowance? 11 Which contributions count towards my Annual Allowance? 12 Does everyone get the full Annual Allowance? 13 How do I benefit from unused Annual Allowances? 13 What happens if I go above my Annual Allowance? 14 How the Annual Allowance works some examples 16 Your Lifetime Allowance 16 What is the Lifetime Allowance? 16 What counts towards my Lifetime Allowance? 17 How much is the Lifetime Allowance excess charge? 17 Who pays the Lifetime Allowance excess charge? 18 Looking for more information? 19 Appendix: relevant UK earnings

3 Getting the most from your pension savings 3 Pensions are one of the most tax-efficient ways to save for your longer term future. To help you make the most of them, in this guide we cover the main things you need to know about tax and your pension. From tax relief on what you pay in and how it works, to your Annual and Lifetime Allowances for pension savings. The information in this guide is our understanding as of August All figures used are for the 2018/19 tax year. It takes no account of your personal circumstances which may have an impact on tax treatment. Laws and tax rules may change in the future without notice. Alliance Trust Savings does not give financial or investment advice. You need to ensure you understand the risks and commitments before investing. The information in this guide is for information purposes only and if you are unsure you should consult a Financial Adviser before investing.

4 4 Getting the most from your pension savings TWO TYPES OF PENSION Saving for a pension through work is probably the most common way for people to start saving for a pension today. There are two main types of workplace pension: 1. Defined Contribution Offered by most employers today What you get back depends on how much you and your employer pay in, how investments perform and how you plan to take income from your savings You ll have some choices about how to take your pension savings when the time comes Sometimes also known as a money purchase pension scheme 2. Defined Benefit It s now very rare to be offered one with a new job What you get back depends on how much you earn and how long you work for your employer You normally won t get much choice in how you take your pension savings Sometimes also known as a final salary or career average pension scheme You can have workplace and personal pensions. Personal pensions, like the Alliance Trust Savings Self Invested Personal Pension (SIPP) Account, are Defined Contribution pension schemes. This guide concentrates on the tax rules as they relate to Defined Contribution pensions.

5 Getting the most from your pension savings 5 TAX AND YOUR PENSION AN OVERVIEW Who can pay into a pension? Under the rules, there are two types of pension contributions: Employer contributions. Your employer can pay these into your pension. Member contributions. You can pay these into your own pension. Or into a pension for someone else that you don t employ (for example your spouse, partner or child). A big difference between the two is: Employer contributions are paid in gross (without tax having been deducted). Member contributions are paid in net (after tax has been deducted) but then attract tax relief up to set limits. How does tax relief work? Your member contributions benefit from tax relief at your marginal income tax rate. This is the top rate of tax you pay on your income. For every 80 paid in, your pension provider can claim another 20 in tax relief from the government, so that a 100 contribution actually costs you just 80. Scottish rates of income tax Income tax is different for those who reside in Scotland. In April 2018, new tax rates for Scottish tax payers took effect. Tax band Rate Starter rate* 19% Basic rate 20% Intermediate rate* 21% Higher rate 41% Top rate 46% * Bands used in Scotland only. You ll get 20% tax relief at source on your member contributions through your pension provider. If you pay Income Tax at the starter rate of 19%, you will not be asked to repay the difference. If you re an intermediate rate, higher rate or top rate tax payer you ll have to claim any additional tax relief through your selfassessment tax return. To keep things simple, all of the examples we give in this guide are based on the income tax rates in the rest of the UK. Then, if you are a higher rate (40%) or top rate (45%) taxpayer you can claim up to an additional 20 or 25 respectively, making the effective cost of a 100 contribution for you as little as 60 or 55. There s a key difference in how higher and top rate taxpayers claim tax relief however. While 20% is reclaimed at source by your pension provider, which works for basic rate taxpayers, if you re on a higher or top rate the additional amount has to be reclaimed through a self-assessment tax return and will reduce your overall tax liability at the end of the year. If you are an employee, an alternative to reclaiming the extra through a self-assessment return, is to ask HMRC for your PAYE notice of coding to be adjusted. This way your tax relief is given through a new PAYE code that extends your basic rate band. To do this you have to send HMRC estimates of both your total income in the current tax year and the total member contributions into your pension (by you and/or others). The use of estimates may mean your coding needs to be adjusted again after the tax year end. The language of pensions Contribution is the technical word for any money paid in to a pension. Member means an individual who is a member of the pension scheme. For this guide we assume that s you.

6 6 Getting the most from your pension savings TAX AND YOUR PENSION AN OVERVIEW Can I pay as much as I want into a pension? There s no actual limit on how much you can pay into your pension during a tax year, but there is a level above which you no longer receive tax relief. This is imposed through the Annual and Lifetime Allowances for pension savings, which we ll come to shortly. The amount of tax relief you benefit from can be affected by a few other factors too, including age, residency status and your earnings for the tax year in question. Age You can only benefit from tax relief on member contributions made before your 75th birthday. If you have an Alliance Trust Savings SIPP Account, from your 75th birthday we do not accept any contributions in to your pension. Residency status You have to be a relevant UK individual, meaning one of: You had relevant UK earnings chargeable to income tax during the year Are resident in the UK at some time during the year Were resident in the UK at some time in the five previous tax years and when you became a member of your pension Your spouse has earnings from overseas Crown employment that are subject to UK tax If you are a US national or US resident, you won t be able to open an Alliance Trust Savings SIPP Account. Earnings You can only get tax relief on member contributions that are the greater of: 100% of your relevant UK earnings (roughly speaking, what you earn and pay tax on from your employment, through being self-employed or by running a UK furnished holiday lettings business) or 3,600 per year if you are a UK resident with no earnings As this is such an important definition for tax and your pension, we ve included more detail on what counts towards relevant UK earnings in the Appendix at the back of this guide. A useful point to note from this is that anyone resident in the UK, even if they have no earnings, can receive member pension contributions of up to 3,600 each tax year ( 2,880 paid in plus 720 in tax relief) up to their 75th birthday. That includes children and spouses/partners who aren t in employment.

7 Getting the most from your pension savings 7 How you can benefit from pension tax relief Remember, these examples are based on 2018/19 income tax rates in the UK except for Scotland. People with no earnings Basic rate tax payers Your personal investment 2,880 Tax relief 720 Your personal investment 8,000 Tax relief 2,000 Including tax relief, you can still pay in up to 3,600 each year to a pension. So you actually pay 2,880 and, with basic rate tax relief at 20%, HMRC tops this up with 720. If you pay in 8,000 from your own pocket, with basic rate tax relief at 20% HMRC tops this up with 2,000. Higher rate tax payers Top rate tax payers Selfassessment tax return 2,000 Your personal investment 8,000 Tax relief 2,000 Selfassessment tax return 2,500 Your personal investment 8,000 Tax relief 2,000 If you pay in 8,000 from your own pocket, with tax relief at 20% HMRC tops this up with 2,000. And because you are a higher rate tax payer you can then claim back up to another 2,000 through your selfassessment tax return (as long as you ve paid that much tax at the higher rate). If you pay in 8,000 from your own pocket, with tax relief at 20% HMRC tops this up with 2,000. And because you are a top rate tax payer you can then claim back up to another 2,500 through your self assessment tax return (as long as you ve paid that much tax at the additional rate).

8 8 Getting the most from your pension savings Your pension contributions can potentially help you make savings elsewhere in your financial life.

9 Getting the most from your pension savings 9 TAX AND YOUR PENSION AN OVERVIEW What if I contribute more than I can claim tax relief on? If you pay in more than your available Annual Allowance, you cannot claim the excess back and you will have to pay an Annual Allowance Charge (see page 11 for the details). If you re still within your available Annual Allowance you can ask your pension scheme to refund any excess member contributions above your relevant UK earnings through an excess contributions lump sum. You won t have to pay tax on any contributions refunded this way. Can contributing to my pension help me make savings elsewhere? Yes. As well as helping you save for your retirement in a tax-efficient way, your pension contributions can potentially help you make savings elsewhere in your financial life. This is a complex area and one where you may benefit from the services of a Financial Adviser. But here are two examples to illustrate. Child Benefit Child Benefit is reduced or removed for families where at least one parent earns more than 50,000 a year. The High Income Child Benefit Charge amounts to 1% for every 100 of adjusted net income above 50,000. That adjusted net income figure is calculated after taking account of member pension contributions made during the tax year, which means you can lower it by making larger pension contributions. Say, for instance, that your annual income is your 55,000 salary, your partner has income of 28,000 and you have two children. You re currently able to claim of child benefit, once the High Income Child Benefit Charge has been accounted for. But a 5,000 pension contribution (including 2,000 tax relief) would take your adjusted net income down to 50,000, a level at which you can receive your full annual child benefit entitlement of 1, Personal Allowance Your tax free Personal Allowance for income tax reduces by 1 for every 2 of income above 100,000, meaning it disappears entirely at 123,700, under the current Personal Allowance of 11,850. If your total income is 123,700, a member pension contribution of 23,700 ( 18,960 from you and the remainder in the form of tax relief) takes your income back down to 100,000 for this purpose, making the full 11,850 Personal Allowance available. Tax band No contribution With contribution 0% No allowance on 11,850 20% on 34,500 6,900 tax 40% on 89,200 35,680 tax on 58,200* 11,640 tax on 56,650 21,460 tax Total tax 42,580 33,100 * The normal basic rate band of 34,500 has been extended by an amount equivalent to your gross pension contribution of 23,700. You can see that, overall, this lowers the income tax payable on your 123,700 income from 42,580 to 33,100, leaving you a net income of 90,600 compared to 81,120 before. Another way to think of this is that the 9,480 difference in tax cuts the effective cost to you of your 23,700 contribution to just 9,480 ( 18,960 minus the 9,480 difference) equivalent to 60% tax relief.

10 10 Getting the most from your pension savings TAX AND YOUR PENSION AN OVERVIEW When I want to access my pension, what taxes will I pay? While income tax relief on pensions cuts the cost of making pension contributions in the first place, pension income is taxable, so you also need to think about the rate of income tax you could potentially pay when you draw on your pension income. The normal minimum age for doing this is currently 55. There are two main approaches to taking money out of your pension. One would see you take a tax free lump sum normally up to 25% of the total value of your pension (or 25% of your Lifetime Allowance if this is less) and use the rest to set up your taxable pension income. The other would see you take your money out as one or a series of cash lump sums. For each lump sum, 25% will normally be paid tax free and you will be taxed on the rest. If you like, you can start with this cash lump sums approach and move to the one described above later. But you cannot do things the other way around. Above your 25% tax free allowance, your pension income will be taxable at your marginal rate in the tax year that you take it. Depending on your personal circumstances, if you take a large amount out at once that may mean you end up paying a higher rate of tax than usual. Remember to take other taxable income you may be receiving into account in working out your potential tax bill. For example, any pension you expect to receive from a defined benefit workplace scheme, and your state pension. The full state pension for anyone reaching state pension age this tax year is just over 8,500 ( a week). Find out more When it comes to accessing your pension savings, with personal pensions at least you ll normally have a great deal of flexibility and choice. For details read our Accessing Your Pension Savings Guide at alliancetrustsavings.co.uk in the pension Forms and Documents section.

11 Getting the most from your pension savings 11 YOUR ANNUAL ALLOWANCE What is the Annual Allowance? The Annual Allowance is the maximum amount you can pay into a pension (or build up, in the case of defined benefit schemes) each year while still receiving tax relief. The amount you pay in (or build up) above the Annual Allowance does not benefit from tax incentives and you may also suffer a tax charge on it. If your relevant UK earnings in a year are less than your Annual Allowance, then your earnings become the maximum amount on which you can receive tax relief. If you have no earnings the maximum amount is 3,600 and if you are over 75 you won t qualify for tax relief at all. The Annual Allowance is a very useful restriction to understand when it comes to effective financial planning, but it s also one of the most complex areas of pension tax rules. We ve covered the main principles in this guide but, remember, it takes no account of your personal circumstances which may have an impact on tax treatment. Your Annual Allowance for a particular tax year can effectively be increased if you haven t used all of it in previous years, as you can carry forward the unused amount for up to three tax years. Which contributions count towards my Annual Allowance? If you re in a workplace Defined Contribution scheme, or a personal pension to which your employer makes a contribution, you should keep in mind that both your contributions and those made by your employer are assessed against the allowance. It s a different case for Defined Benefit schemes. Here it s not the contributions made (either by you or your employer) but the amount of benefits built up each year that counts towards your allowance. To be precise the inflation adjusted increases in your accrued pension entitlement under the scheme. Working out the exact level of contributions or benefits that count towards the Annual Allowance isn t always straightforward. The easiest way to make sure you get the right figure whether for contributions to a Defined Contribution scheme or for defined benefits built up is to ask your pension scheme administrator(s) for details of the pension input amount for each tax year in question. They are legally obliged to provide these details either three months after receiving your request or by 6 October following the end of the relevant tax year (whichever is later). This is particularly useful if you want to offset a potential charge for a year in which you go above the allowance. We ll come back to this again later. As the Annual Allowance rules are quite complicated, if you would like to get the maximum tax benefit from your Annual Allowance, financial advice is likely to be a very sound investment. The language of pensions Pension input amount is the term used to cover the elements that count towards your Annual Allowance. That s employer contributions and member contributions for Defined Contribution schemes, and benefits built up in Defined Benefit schemes.

12 12 Getting the most from your pension savings YOUR ANNUAL ALLOWANCE Does everyone get the full Annual Allowance? No, there are two instances where the Annual Allowance can be reduced for some people. If you are a high earner ( 150,000 or above). For every 2 your income goes above 150,000 your Annual Allowance drops by 1. With a maximum drop of 30,000 (to 10,000) when your income hits 210,000. If you have started flexibly accessing your pension savings. In this case your Annual Allowance is restricted to just 4,000. You are also not allowed to carry forward any unused allowances. High earners There are actually two income amounts that apply in working out whether your allowance will be tapered: Threshold income this excludes your pension contributions, and is 110,000 Adjusted income this includes your employer contributions and member contributions for the year and is 150,000 These definitions are broad, to give you the general idea. HMRC s definitions are detailed and complex and you may find it helpful to work with a Financial Adviser if this is an important area for you. If your adjusted income is above 210,000 or unlikely to reach 150,000 then your position is clear. You ll have an allowance of 10,000 or 40,000 respectively. But if your adjusted income is likely to be somewhere between 150,000 and 210,000, your allowance will be tapered. You won t know by exactly how much until the end of the tax year. Which means although you ll be able to make some estimates you won t know exactly how much to contribute to maximise your Annual Allowance without going over it. People accessing pension savings As soon as you start flexibly accessing your pension savings, your Annual Allowance is replaced the following day by the Money Purchase Annual Allowance (MPAA) of 4,000. Flexibly accessing your pension savings includes: Taking income from a flexi-access drawdown fund in your name (that could be your own pot, or that of a deceased spouse for example) Taking an uncrystallised funds pension lump sum (often abbreviated to UFPLS) Taking benefits under the flexible drawdown rules prior to 6 April Some things won t trigger the MPAA. For example: Taking a trivial commutation lump sum (where you swap a small regular income for a lump sum) Taking a pension commencement lump sum (a tax free lump sum of up to 25% of the value of your pot) provided no income is then withdrawn Receiving any form of beneficiary s income resulting from someone s death. If you re thinking of accessing your pension savings it would be wise to check the full list of events that trigger the MPAA to make sure you stay on the right side of the rules. This is another very complicated area where you may find it helpful to work with a Financial Adviser.

13 Getting the most from your pension savings 13 Consolidating your pension savings to one online platform, like Alliance Trust Savings, is one way to make it easier to keep track. Consider taking advice The Annual Allowance rules tend to change quite frequently, so if you re planning to make a big one-off contribution and want to use the carry forward rules you should consider taking financial advice.

14 14 Getting the most from your pension savings YOUR ANNUAL ALLOWANCE How do I benefit from unused Annual Allowances? The ability to carry forward can be especially useful if you haven t used all of your Annual Allowance over the past three years but you can make a large one-off contribution in the current tax year. The amount you can carry forward is based on the previous levels. This means you (and your employer together, where relevant) could contribute up to 160,000 in the current tax year, minus your total pension input amount this year and in the previous three tax years. The 160,000 figure is made up of the current 40,000 allowance and the allowance from the previous three years. You can only carry forward unused allowances if you were a member of a UK registered pension scheme at some point in that tax year. Do not forget about other restrictions, however. Even if you keep within your Annual Allowance (including any carry forward), the maximum member contribution you can make in a tax year is either 3,600 or 100% of your relevant UK earnings, whichever is greatest. What happens if I go above my Annual Allowance? If you are not able to carry forward unused Annual Allowance from previous years to cover the extra, this is where the Annual Allowance Charge comes into play. This penalty, levied when your pension input amount in a tax year goes above your Annual Allowance, is a charge to income tax. It s charged at the same rate(s) that would apply if the amount by which you have exceeded your allowance was added to your taxable income for that year. The charge is calculated based on your income tax rate(s) after allowances and expenses have been taken off. Which means it doesn t affect things like the tapering of the tax-free Personal Allowance that we looked at earlier (if adding the excess amount would take your income over the 100,000 threshold for that). If you re liable for an Annual Allowance Charge the responsibility lies with you to report it through a self-assessment tax return, even if you don t normally complete one. There is also an option to ask your pension scheme to settle the charge (meaning your pension benefits are reduced by the charge, rather than your taxable income increased). If the charge is above 2,000 and your pension input amount for that particular scheme is above your Annual Allowance for the year, then your scheme has to pay the charge if you ask. If these conditions are not met, a scheme can voluntarily agree to pay your charge. Important note If you benefit from pension contributions that for some reason don t qualify for tax relief, no matter who paid them they will usually still be included in your pension input amount for the purposes of calculating any Annual Allowance Charge. Remember If you re still within your available Annual Allowance but have paid in more member contributions than your relevant UK earnings for the year, you can ask your pension scheme to refund the excess through an excess contributions lump sum. You won t have to pay tax on any contributions refunded this way.

15 Getting the most from your pension savings 15 How the Annual Allowance works some examples These examples assume Pamela and John s income is made up only of salary and not investments and that they haven t already flexibly accessed any pension income, so aren t subject to the MPAA. 1. Carrying forward unused allowance Pamela has unused Annual Allowances adding up to 37,000, from the 2015/16, 2016/17 and 2017/18 tax years. When her current tax year Annual Allowance of 40,000 is added to that she has a 77,000 maximum pension input amount for 2018/19 without suffering an Annual Allowance Charge. Pamela s expected earnings for the tax year are 100,000. Her unused allowances include 13,000 carried forward from the 2015/16 tax year. This will be lost if she doesn t use it this tax year. So if she wants to use it, and not lose it, her pension input amount for 2018/19 needs to be at least 53,000. Pamela can pay 53,000 in member contributions and still qualify for tax relief as her expected earnings are more than this ( 100,000). 2. The impact of Annual Allowance tapering for high earners Pamela wants to estimate her adjusted income for 2018/19 and thinks it will be 168,000, but she also has the Annual Allowance carry forward amount set out in the previous example ( 37,000). By making the maximum possible pension contribution (taking into account employer contributions and her own member contributions) of 77,000 (based on 37,000 plus the current tax year Annual Allowance) she can lower her threshold income and prevent her Annual Allowance from being tapered at all. While Pamela s adjusted income would still be 168,000, her threshold income is reduced to 91,000 by the 77,000 pension contribution. If her adjusted income estimates were accurate, she would actually only need to make a pension contribution of 58,000 to reduce her threshold income to the 110,000 level and so avoid the tapering. That would leave Pamela with 19,000 of unused Annual Allowance still available to carry forward into the future. 3. Calculating an Annual Allowance Charge John is a member of a Defined Benefit scheme and also has a SIPP into which he paid 20,000 during 2018/19. His Defined Benefit pension scheme administrator tells him, months after the end of that tax year, that his pension input amount for that scheme was 30,000, taking him with his SIPP contributions 10,000 over his Annual Allowance of 40,000. He has no unused allowances from previous years to carry forward, so his Annual Allowance Charge will be based on the 10,000 amount above his Annual Allowance. John s only income for 2018/19 is 105,000 (after taking into account his pension contributions) reduced to 95,650 once his tapered tax-free Personal Allowance for income tax is factored in. So his Annual Allowance Charge will be taxed at the same 40% rate that would be applied if he were adding 10,000 of taxable income to the 95,650. That generates an Annual Allowance Charge of 4,000, which, as it s above 2,000, means he can ask one of his pension schemes to pay the charge on his behalf, reducing his pension benefits rather than increasing his income tax bill. Neither scheme is legally obliged to do this though, as his pension input amount for each was within the Annual Allowance. So he would need to seek agreement.

16 16 Getting the most from your pension savings YOUR LIFETIME ALLOWANCE What is the Lifetime Allowance? The Lifetime Allowance effectively puts a limit on the amount of tax-relieved pension savings you can benefit from in your lifetime. You can still use anything you build up above your Lifetime Allowance, but it is subject to a tax charge (the Lifetime Allowance excess charge). The Lifetime Allowance is currently 1.03 million, in April 2016 it had been reduced to 1 million from 1.25 million. It was set at 1.5 million when it was introduced in 2006 and went up to 1.8 million in 2010 before a series of cuts. Transitional protection arrangements were put in to help people avoid being caught out by reductions in the Lifetime Allowance. We won t go into the details here, focusing instead on how the Lifetime Allowance affects the way you build up your pension. You can find more information about transitional protection: In our Accessing Your Pensions Savings Guide available in the pension Forms and Documents section at alliancetrustsavings.co.uk On the gov.uk website What counts towards my Lifetime Allowance? When the benefits you take from your pension go over your Lifetime Allowance, you are charged a Lifetime Allowance excess charge on the amount you take above it. The charge only applies when the value of the benefits goes above your Lifetime Allowance following what is known in pensions technical language as a benefit crystallisation event. The list of events in which your pension benefits can be tested for a Lifetime Allowance excess charge is extensive, and includes: When you take money from your fund, either as a lump sum or by setting up a pension income (or an entitlement to one) If you are unfortunate enough to die before you turn 75 If you reach 75, but haven t yet used your pension savings to set up an income If you transfer your pension savings to a scheme outside of the UK that meets certain conditions (if it doesn t meet those conditions you could lose the entire amount transferred to a tax charge, not just the amount above your Lifetime Allowance). Each time you trigger a benefit crystallisation event by using some of your pension savings, the percentage of your Lifetime Allowance that that event accounts for is calculated. Over time this reduces the allowance you have left for future events until your whole allowance is used up. From that point on you will pay a Lifetime Allowance Excess Charge on any money you take out. Practical tip 1.03 million might sound like a lot, but it is easy to underestimate how much your pension savings might be worth by the time you reach retirement. This is one of many reasons why making an effort to keep track of and regularly review all your pension pots makes sense. Consolidating your pension savings to one online platform, like Alliance Trust Savings, is one way to make it easier to keep track. It won t be for everyone though. You could lose valuable benefits by transferring for example and you might want to consider taking financial advice. But it can save a huge amount of time for you in keeping track and potentially a hefty Lifetime Allowance excess charge further down the line.

17 Getting the most from your pension savings 17 How much is the Lifetime Allowance Excess Charge? The amount of the Lifetime Allowance Excess Charge depends on how you use the money above your Lifetime Allowance: If you take it out as a lump sum, the Lifetime Allowance Excess Charge is 55% If it s left in your pension pot to generate further growth (and therefore, potentially, a higher taxable income in future), the rate of tax is 25%. If you are a higher rate tax payer, in practice it doesn t make a difference which way you take the amount above the Lifetime Allowance, at least in terms of the tax charge (paying 40% income tax on a fund that has already suffered tax at 25% is effectively the same as a one off tax charge of 55%). However, it s a different matter if you pay income tax at either 20% or 45%. What you actually do might be dictated by factors other than the tax charge. It might be possible under your scheme rules to take some of the excess as a lump sum and part of it as income. Who pays the Lifetime Allowance Excess Charge? The responsibility lies jointly with you and your pension scheme administrator. The administrator will usually deduct any Lifetime Allowance Excess Charge and settle it with HMRC before it pays you benefits from the scheme. It is important to note that if the charge is applied to your pension pot after you ve died, the responsibility will be with whoever the beneficiary is for the death benefits paid out by your pension scheme. In that instance, the details of any benefit crystallisation events have to be reported to HMRC by whoever is administering your estate, as the charge will not have been deducted by the scheme. HMRC will then work out the Lifetime Allowance excess charge and, where there s more than one payment or one beneficiary, how it should be split between them. Basic rate taxpayer A 20% tax charge on income from a pot that has already had tax of 25% deducted from it is equivalent to a lump sum tax charge of approximately 43.75%. Therefore, you ll face a lower charge overall if you leave the money in your pot to provide an income in future. Taking the excess as income over a series of tax years, rather than as a single lump sum, may also prevent you from being dragged into a higher rate tax bracket. Additional rate taxpayer A 45% tax charge from a pot that has already had tax of 25% deducted from it is equivalent to a lump sum tax charge of approximately 58.75%. Therefore, you ll face a lower charge overall if you take the excess out as a single lump sum. Higher rate tax payer Paying 40% income tax on a fund that has already suffered tax at 25% is effectively the same as a one off tax charge of 55%. For example, if you exceeded your LTA by 10,000, you would pay a 5,500 tax charge (55%) if you took this amount as a lump sum. If you took it as income you would pay a 2,500 tax charge (25%). You would also pay tax at 40% when you withdraw the remaining 7,500 as income. That s 3,000, and added to the 2,500 tax charge you will already have paid, also adds up to 5,500.

18 18 Getting the most from your pension savings LOOKING FOR MORE INFORMATION Already an Alliance Trust Savings customer? If you have questions about how the information in this guide applies to your SIPP Account with Alliance Trust Savings, our Customer Service Team will be happy to help. We can answer factual questions but are unable to give financial advice. Thinking of becoming an Alliance Trust Savings customer? To find out more and apply for a SIPP Account with Alliance Trust Savings visit alliancetrustsavings.co.uk. 4,000+ investment options contact@alliancetrust.co.uk 24/7 online account access Flat Account fees that won t grow with your investments Phone lines are open 8am to 5pm Monday to Friday, and Calls may be recorded for training and monitoring purposes. Recognition we ve received WINNER Best Customer Service WINNER Best ISA Provider 2015 WINNER Best SIPP Provider

19 Getting the most from your pension savings 19 APPENDIX: RELEVANT UK EARNINGS Counts towards relevant UK earnings Profits from self-employment derived from a trade, profession or vocation (whether as an individual or as a partner acting personally) Employment income (salary or wages, bonuses, overtime, commission) that is chargeable to tax Benefits in kind that are chargeable to tax (this applies to directors, and to employees earning 8,500 or more a year) Any part of a redundancy payment above 30,000 (in other words, the part that is chargeable to tax) Statutory sick pay and statutory maternity pay provided by the employer and chargeable to tax Permanent health insurance payments paid by the employer while the individual is still in the employment Does not count towards relevant UK earnings Dividends Pensions Savings Property (such as rent) Any part of a redundancy payment that s not chargeable to tax (the first 30,000 of such a payment) All State benefits Profit-related pay (including the part which is not taxable) Benefits in kind for non-directors earning less than 8,500 a year Patent rights treated as earned income Salary paid by way of Government securities Remuneration in the form of units in an authorised unit General earnings from overseas Crown employment which are subject to tax Partnership share money deducted from an employee s salary in accordance with a partnership share agreement Statutory sick pay and statutory maternity pay paid by the DWP Permanent health insurance payments paid directly to the individual by the insurance company after employment has ceased Earnings from international organisations with no income tax liability, including the United Nations and the World Health Organisation Employer payments to employer-financed retirement benefit schemes (these are non-registered pension schemes) income from patents which have been purchased Approved share options which are not taxable Income arising from certain furnished holiday lettings businesses Approved/unapproved share options which are taxable

20 Alliance Trust Savings Registered head office: PO Box 164, 8 West Marketgait, Dundee DD1 9YP +44 (0) contact@alliancetrust.co.uk alliancetrustsavings.co.uk Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number Alliance Trust Savings gives no financial or investment advice. ATS GEN G 0020 (9833)