Pensions is now the time to make contributions?

Should you put more into your pension scheme? Everyone with earnings should revisit this question following this year’s Budget proposals for greater flexibility in accessing pension savings. The main changes are due from April 2015 but there have also been important relaxations this tax year.

From April 2015, it will still be possible to take 25% of your pension fund tax-free from the age of 55, but under the proposed new rules, the aim is that you should then have broadly unrestricted access to the rest of your accumulated pension funds. It will still be possible to buy an annuity to secure a guaranteed lifetime income and this might well continue to be the best solution for many people. But it will become easier and generally less expensive to use other approaches.

The income you can draw is subject to income tax – but not national insurance contributions. So drawing excessive amounts from a pension fund could generate unnecessarily large tax liabilities that it might be possible to avoid or reduce by taking withdrawals spread over several years.

While investments remain in a pension fund, you can buy and sell them and accumulate income without paying any UK tax. It is only when you draw them out that you pay income tax on them. So it will generally make sense to only take income from the pension when it is needed for expenditure, or possibly for some individuals, in years of unusually low taxable income.

The increased attractiveness of pension investment has arrived just after a reduction to the effective limits on how much you can contribute. The maximum tax-efficient annual pension investment for an individual is now £40,000 (previously £50,000) and the lifetime allowance is £1.25 million, down from £1.5 million before 6 April 2014.

Your pension planning should also take into account the possibility of further changes. A new Government might limit tax relief on pension contributions to the 20% basic rate or perhaps a 30% flat rate for all – proposals that have often been aired recently – and reduce the lifetime and annual allowances.

All this makes 2014/15 a good year to consider maximising your pension contributions, if your savings have not exceeded the lifetime allowance. You can generally bring forward your unused annual allowances from the previous three years.