Don’t get caught out by auto-enrolment
01 Oct, 2012
Andrew James, advice policy manager for Towry, the Wealth Adviser, comments on how to avoid potentially huge tax bills due to auto-enrolment:
“For many, pensions are a great way of investing for retirement. However, whilst many employees will now benefit from having pension contributions made on their behalf (assuming that they can afford their own contributions) there will be some who could be adversely affected by being caught up in the enrolment process. These will be individuals who have previously applied for the various forms of pension protection that have been available following changes in pension legislation, who may be liable to a tax charge under auto-enrolment.
“Don’t forget that the annual allowance limits pension contributions to £50,000 each tax year. If you are already fully utilising the annual allowance, then make sure you take account of any likelihood that you will be auto-enrolled at some stage in the tax year and make sure that you do not over contribute. Tax relief will not be available on any payments made above the annual allowance and will be recouped either in the form of a tax charge following the completion of a tax return or, if the charge is in excess of £2,000, it can be paid from the pension scheme and therefore reduce the overall benefits that will be received from the scheme.
“You should also make sure that any new contributions are not likely to cause your total pension savings to exceed the new lower £1.5m lifetime allowance, or at least if they do, that you are comfortable that the benefits from these new contributions outweigh the tax consequences.
“In any case, getting the right advice is going to be important.”