Latest news with #finalsalarypension
Telegraph
07-07-2025
- Business
- Telegraph
‘Should I pay my final salary pension into a Sipp to drop a tax band?'
However, when the lifetime allowance was abolished, anyone who already had fixed protection before March 15 2023 (the date of the Budget announcement) could resume paying into or getting pension contributions and keep their protections. So, although one part of the rules relaxing means you might be able to start paying in again, the tax relief rules might still get in the way of you achieving your goal of minimising your higher-rate tax, or mitigating it completely. Tax relief and earnings You can claim tax relief on the greater of 100pc of your UK earnings, or £3,600 in any tax year. For most personal pensions, including Sipps, contributions are typically taken from pay after tax and topped up by basic-rate (20pc) tax relief returned from the Government, which is paid directly into the pension. If an individual paid in £4,000, this would be topped up by £1,000 basic-rate relief, meaning £5,000 goes into their Sipp. A UK resident with no earnings can pay in up to £2,880 a year, which is topped up by pension tax relief to £3,600. You've mentioned that you receive income from a final salary pension scheme. Although pension income is taxed under income tax in the same way as salary or bonuses earned in your working life, it is not classed as earnings when calculating how much you can pay into a pension for tax relief. The same goes for investment income like dividends, savings income or property rental income, even if you are paying higher rates of tax on these sources. I'm afraid that unless you have earnings from another source, your ability to make pension contributions for tax relief is going to be very limited, meaning your strategy is unlikely to work. The full list of what counts as relevant UK earnings can be found in the Government's pension tax manual. Your question does raise some important points about how pension tax relief works, and the interaction with the personal savings allowance, so I've taken the chance to explain this below and it should help if you do have some earnings after all. The second lever the Government uses to limit the value of tax relief is the annual allowance. This allowance is £60,000 per tax year for most people, and applies to the total gross pension contributions made by or for you across all your pension schemes. So your own payments, the automatic government top-up and any employer contributions. The allowance is lower for people with very high incomes (usually £200,000 plus), or those who have already accessed a pension using a flexible income option, like pension drawdown. How pension tax relief works I've mentioned that schemes like Sipps automatically top up money you pay in personally by 20pc tax relief. So, for every £800 you save, £1,000 in total ends up in the pension pot. But people who pay more than 20pc tax on their earnings can claim more relief by contacting HMRC directly. This includes Scottish taxpayers paying intermediate tax (21pc) and above, and higher-rate (40pc) and additional-rate (45pc) taxpayers in the rest of the UK. The amount of extra tax relief on offer will depend on someone's earnings, and how much falls into those higher rates of tax. As you've pointed out, making a pension contribution and claiming that extra tax relief has the effect of expanding the basic-rate band, bringing all or some earnings out of higher rates of tax. For people earning between £100,000 and £125,140, the tax-free personal allowance is gradually removed, resulting in an effective tax rate of 60pc – or up to 67.5pc in Scotland. It's possible to use pension contributions to reduce taxable income, claw back personal allowance and boost retirement savings, if someone's UK earnings allow. Personal savings allowance You also mentioned the personal savings allowance. If someone can move out of a higher tax band thanks to pension contributions, it can help them get more of their savings interest tax-free. This is because the amount of personal savings allowance someone has depends on your tax rate. Basic-rate taxpayers get a £1,000 allowance, but the allowance is halved to £500 for higher-rate taxpayers and lost completely for those paying additional-rate income tax. How to claim extra tax relief The Government has recently introduced an online service to help claim extra tax relief, which makes things much easier for those who don't usually have to complete a tax return and avoids getting stuck on the telephone to the taxman. People who already complete a tax return will need to include their total gross (personal) pension contributions on the pension pages of their return to claim relief. Most of the above on pension contributions also applies to charity donations made under gift aid, except that pension income received does count as income on which gift aid can be claimed. So, if you don't have UK earnings and still want to reduce your marginal rate of tax, you could consider your favourite charity. I hope this has helped to answer your question, even though it might not be the tax outcome you were hoping for. With best wishes, – Charlene
Telegraph
17-06-2025
- Business
- Telegraph
What is pension clawback, and is your retirement at risk?
Pension clawback is an outdated feature that's still embedded in some final salary pension schemes, which could see your retirement income cut once you reach state pension age. Clawback has become controversial. Over the years it has taken people by surprise and negatively affected their retirement plans. Women have been hit particularly hard by the rules. Over the years, many final salary schemes, also known as defined benefit schemes, which guarantee a set income for life, have changed their rules or phased out pension clawback, choosing to either cap it or scrap it. But there are still some that are affected. Here, Telegraph Money explains what pension clawback is, what impact it can have, and what you can do about it. What is pension clawback? How is pension clawback calculated? What impact could pension clawback have on my savings? What can I do about pension clawback? Will the Government abolish pension clawback? What is pension clawback? Pension clawback, which can also be referred to as 'pension integration' or 'bridging pension', is an outdated feature of some defined benefit workplace schemes. It dates back to 1948, when the state pension was first introduced and linked to defined benefit schemes. Clawback aimed to prevent individuals or schemes from overpaying on pension contributions, on the assumption that the state pension would top up the retiree's income, enabling the employer to offset some National Insurance costs. The state pension and defined benefit schemes are no longer linked, and these 'National Insurance modification' rules were abolished in 1980, but some work schemes are still designed around them. Lisa Picardo, from PensionBee, said: 'When an employee reaches the state pension age, this practice allows employers to 'claw back' some of the pension contributions made.' This penalty cuts the workplace pension based on the assumption your state pension will 'top-up' the shortfall. Ms Picardo added: 'The problem is, this can result in an unexpected noticeable drop in income just as someone reaches a milestone they've been working towards their whole working lives.' How is pension clawback calculated? Pension clawback is taken as a fixed cash amount, calculated based on your years of service linked to the affected pension scheme, when you reach or have reached state pension age. This means that employees who have worked for the same number of years can have the same amount of money deducted from their pension payout, even though they did very different jobs and earned very different amounts. This is in contrast to other types of pension fees, which are often charged as a percentage of your pot. Who is affected? Anyone with a defined benefit pension that includes these rules can be affected by pension clawback. However, some will notice the effects more keenly – as pension clawback deducted from the pension is a fixed cash amount, it disproportionately affects those with smaller pension pots and lower pension incomes. Women, early retirees and lower-paid workers are often the hardest hit.
Daily Mail
29-05-2025
- Business
- Daily Mail
Warning over pension clawback - could it hit YOU at state pension age?
'Pension clawback' means your final salary pension might be cut when you reach state pension age. The reason for this originates in rather arcane arrangements dating back to the dawn of the welfare state in the 1940s - and many pension schemes have since changed their rules or phased out the practice. But if you are due a final salary pension via a current or old employer it is worth paying close attention to all information on the paperwork you are sent - and any choices you are being asked to make – especially in the run-up to retirement. If you discover your scheme operates 'clawback' it's most important to fully grasp the rules, particularly if you retire before 66 and so will see a drop in your work pension after you start receiving your state pension. Be prepared in advance, and ask questions of your scheme about the impact on you personally, to avoid any nasty shocks to your budget later in retirement. Clawback has become controversial over the years, as we will explain below, because people are understandably exercised by a sudden loss of income when they don't expect it or haven't had an explanation. Here's what you need to know about pension clawback... What is 'pension clawback' and how does it work? Pension schemes use different names for this and it's worth knowing the financial jargon. In addition to clawback, you might hear references to integrated pensions, state pension offsets and bridging pensions. Arrangements for 'integrating' work and state pensions began back when the modern welfare state was created, which led to more people paying National Insurance from 1948. Final salary (also known as defined benefit) pension schemes, both private and public, wanted to take account of more staff now receiving a state pension. They sought to prevent schemes themselves or individual members overpaying contributions or doing so unnecessarily, just to duplicate benefits. The rules for doing this and the calculations involved varied, and changed over time (if you're interested in the history, the House of Commons Library published a briefing on pension clawback in 2020). Nowadays, most private sector final salary pension schemes are no longer linked to state pensions. Public sector pension schemes stopped taking them into account decades ago, except for service before 1980. But some work schemes are still designed around them, and the result is that payments may be cut when a member reaches state pension age, to adjust for lower contributions made earlier by the scheme itself and its members. The size of the reduction depends on the scheme, but it is a fixed amount and usually works out at a few thousands of pounds a year. This has a bigger impact on someone with a small pension than a larger one. Clawback is sometimes embedded in a scheme's rules and will kick in automatically. However, some schemes offer workers the option of taking a higher 'bridging' pension - just until they reach state pension age - or a lower 'level' one. They work out the cost to end up being the same either way, but people who get the choice can find it convenient to have a temporarily higher income while they wait to get a state pension. This is why you should read pension documents carefully in the run-up to retirement, so you know where you stand if you are affected by clawback (or a myriad other important matters). If you are not sure, or don't understand the information you are sent, ring up or email your scheme and ask if it is has clawback arrangements. Staff should be prepared to take the time to answer and explain any impact on you individually - better now than when you reach state pension age and are surprised by a sudden cut in your work pension. Controversy over pension clawback If you do not know beforehand that clawback is going to reduce your work pension when you reach state pension age, you will understandably feel aggrieved - and it causes hardship in some cases. Clawback was condemned by some MPs as outdated and punitive during an adjournment debate in the House of Commons in April. Several cited constituents who had seen cuts of several thousand pounds, amounting in some cases to 13 per cent or 16 per cent of a pension, and there were calls for abolition of clawback. Criticism was aimed in particular at a Midland Bank pension scheme, now run by HSBC, which is opposed by the Midland Clawback Campaign and the union Unite. See the box below for HSBC's stance on clawback. Those against clawback often point out that it is regressive, in that fixed reductions disproportionately affect people with smaller pensions, who are often women. What does HSBC say about clawback? HSBC's position on [an amendment to] the state deduction has been consistent; it would constitute a retrospective change to the scheme that would benefit a particular group of members and would be unfair to other scheme members. It would increase the risk of grievances being raised by other pension scheme members both in the UK and globally and would set a precedent for further challenges to pre-existing valid terms and conditions that could lead to significant unplanned and unintended costs. Pension firm PensionBee says: 'As pension clawback is a fixed cash amount deducted from your pension - unlike other charges which usually deduct a percentage of the pot - its impact on your pension can vary. 'Those with larger pensions will be less affected, whilst smaller pots can see a substantial loss.' It offers the following example: 'If you received £50,000 a year from your workplace pension scheme, then a fixed pension clawback of £2,500 a year would equal a 5 per cent deduction every year. 'However, if you received £10,000 a year from your workplace pension scheme, then that same fixed £2,500 clawback would equal a 25 per cent cut to your annual pension income.' On its website, PensionBee says: 'Whilst most schemes have capped or withdrawn clawback, it's worth checking if you could lose out on a chunk of your pension. 'Those most affected are the lowest income workers, often women, and those seeking to retire early. 'If you're enrolled in a pension clawback scheme, it's likely you aren't even aware yet. One of the issues is poor communication, with few people affected aware of its importance.' PensionBee suggests asking your workplace pension scheme directly or checking your company handbook, and considering making additional contributions to offset the future loss from pension clawback. Will the Government abolish clawback? Successive governments have declined to force pension schemes to end clawback arrangements. The Conservative former Pensions Minister Guy Opperman said in 2017: 'These schemes were designed to avoid additional contributions from sponsors and members by taking account of some or all of the state pension when calculating the amount of occupational pension payable. 'The arrangement is set out in scheme rules which would have been available to members when they joined the scheme. 'Such arrangements are not a requirement of Department for Work and Pensions legislation. It would not be right to compel schemes to withdraw this integration arrangement. 'That would amount to a retrospective change imposing significant additional unplanned costs. Pension scheme rules on the calculation of benefits are many and varied, and must remain a matter for employers and scheme trustees to decide.' At the House of Commons debate on clawback in April, the current Labour Pensions Minister Torsten Bell gave a lengthy response which you can read here. He said: 'I appreciate that that type of scheme can be controversial, thanks to the change in the private pension income involved. 'All of us sympathise with anyone who expected a straightforward income increase when their state pension kicked in, only to find that things were much more complicated than that. I have read and listened to representations on this issue myself.' He went on: 'Integrating an occupational pension scheme with the state pension was a core design of some schemes, and that has pros and cons. 'It used to be a common feature of final salary schemes, covering almost half of schemes, according to one survey from the early 2000s, although it is far less common today.' Bell said all pension schemes are required by law to provide every member with basic information, either before they join or very shortly afterwards. If someone has not received clear communication they can complain via an internal dispute procedure, and after that to the Pensions Ombudsman. He added: 'I owe it to this House to be clear that we cannot retrospectively change the benefits schemes offered to their members. Any legislative change would affect all integrated schemes, risking the future of some that are less well funded.' What do other pension experts say about clawback? Rosie Hooper, chartered financial planner at Quilter Cheviot, has dealt with clients whose pensions are reduced by clawback. She says: 'Pension clawback often trips people up simply because they don't understand it, and they haven't factored it into their budget. 'The reality is that the reduction isn't usually huge, but it's the surprise element that causes issues.' Hooper says she always explains clearly what a client who is affected should expect. 'It's not that the whole state pension gets deducted which is a common misconception. It's about how some schemes reduce the income they pay once the state pension kicks in. It's not a hidden charge, but it needs to be properly understood.' She says starting to receive the state pension allows people to reduce the income they need to take from other sources, but the step-down in cash flow has to be planned for and built into a retirement plan. 'It's also worth remembering that the state pension used to make up a much bigger share of someone's retirement income,' she adds: 'Today, it's a smaller piece of the puzzle, which makes planning around it even more important.' Simon Taylor, head of defined benefit at pension consultancy Barnett Waddingham, says clawback was typically part of the design of defined benefit (final salary) pensions that remained 'contracted in' to paying second state pensions (Serps or S2P). 'The design meant that both the company and the members paid higher National Insurance, and members generally built up full state pensions,' he explains. People in pension schemes which 'contracted out' of paying more NI usually get lower state pensions. 'Clawback' is essentially a way to integrate the scheme benefit with the state benefit - if it didn't exist, pensions would have cost the company and member more,' says Taylor 'As a result, members would have had lower take-home pay over the course of a career.' He says there are lots of ways for clawback to happen, but obviously if it comes as a surprise it can be poorly received - and communications to scheme members weren't always as thorough as they are today. 'For people hitting state pension age now, it is all likely long-forgotten, and so can feel like a harsh practice,' he says. 'In reality though, the process has its roots in a sensible cost/benefit balance - and the alternative is being in a contracted-out scheme and paying lower National Insurance so getting a lower state pension, or being in a defined contribution scheme and likely receiving far less in the long run. 'Defined benefit pensions remain impressively generous - however, the responsibility sits with the scheme to ensure members understand the realities of their benefits and if and when any deductions will be made.'
