Personal Pension  

Advisers asked ‘to do the impossible’ on annual allowances

Advisers asked ‘to do the impossible’ on annual allowances

Changes to the annual allowance are hampering clients and advisers are “being asked to do the impossible”, according to Talbot and Muir’s head of pensions technical.

In yesterday’s Budget no further changes to the annual allowance were made. But Claire Trott said the area is already “fiendishly difficult” for advisers to navigate.

The calculation to determine how much annual allowance a high earner is entitled to has become increasingly impossible for advisers to work out, she argued.

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Ms Trott said that advisers have to try and determine what their client’s net pay is before the end of tax year as the starting point for the annual allowance taper calculations, including not only salary, but everything that is subject to income tax.

“This could be virtually impossible to do if they have other earnings, such as rental income or earnings outside of their salary that varies.”

Advisers need to take account of the contributions paid to a pension scheme under net pay arrangements, in order to work out if they need to do the full adjusted income calculation where all pension contributions are taken into account.

“All this will mean that the adviser will need information that is probably more akin to that with an accountant would ask for and have to make a judgement on what level of contributions are likely to be viable without breaching the reduced annual allowance.

“For those without a financial adviser I am not sure how they will cope, even if they have an accountant to help them with the initial calculation.”

Ms Trott said that this will mean relying heavily on carry forward to sweep up unused allowances from the year before, but the issue is likely to occur year after year so it will not be possible to use the whole of the allowance without running the risk of exceeding it.

This is unless clients have a normal salary which does not fluctuate, something that was unlikely to be the case for those earning in excess of the current £110,000 threshold income.

Stephen Page, director at Suffolk-based Page Russell, agreed that many advisers will be “suffering from the same admin nightmare”, adding that his firm has been trying to educate clients not to be wedded to the financial year end for planning their annual allowances.

“I can see a rush of clients wishing to discuss their allowances in the last 2 weeks of the tax year,” he commented, noting that this links back to the anti-forestalling rules when the annual allowance was dropped 3-4 years ago.

“They were about making sure that clients didn’t throw too much money into payments and that’s what this is about,” explained Mr Page, stating that for clients he sees on an annual basis, it would be less tricky and those in control of their own income can defer taking it.

“For those who cannot control where they receive income from and how much its going to be its going to be very hard.”