The same things come up at the end of every tax year, but another year of changes has meant an even longer list in 2017. The tapered annual allowance has been introduced, we are about to see a drop in the money purchase annual allowance (MPAA) and the deadline to apply for Individual Protection (IP) 2014 is looming.
Tapered annual allowance
The tapered annual allowance has caused a lot of issues this year, mainly because of the difficulty in calculating a client’s given allowance for a given tax year. Now is the time to try and bring all of the factors together – it will be easier to calculate income for the year now most of it has passed. Although this is unlikely to be totally accurate, you should be able to get a good idea if someone is likely to be subject to the taper by estimating the threshold income.
For those with money purchase pensions, making contributions right up until the end of the tax year is still possible. However, for those lucky enough to be an active member of a final salary scheme, calculating the pension input amount can be more complicated.
In these cases, making additional contributions to use up the allowance without going over the limit will be virtually impossible.
IP 2014 deadline looms
Although it has been almost three years since we saw the drop in the lifetime allowance from £1.5m to £1.25m, there are still options available. Unlike Fixed Protection, Individual Protection made no requirement to cease contributions prior to 5 April 2014. As a result, if the client had been eligible in 2014 they will remain so and can claim protection until 6 April 2017.
To be eligible, the individual would need to have had benefits valued in excess of £1.25m at 5 April 2014. This means they are able to protect a personalised lifetime allowance up to £1.5m. Benefits in excess of this won’t be protected, but can still apply.
The important thing to remember is that it isn’t just fund values you need to look at to establish whether a client can apply for protection.
You should be particularly mindful of those who have the following:
• Deferred benefits in a final salary scheme – valued at 20 times the pension.
• Pre A-Day benefits in payment:
o 25 times the annuity in payment at 5 April 2014.
o 25 times max GAD at 5 April 2014 if in capped drawdown.
o Deemed benefit crystallisation event (BCE) revalued to 2014 if further crystallisations have occurred since A-Day.
• Benefits in payment – BCE amount revalued to 2014.
• Pension commencement lump sum (PCLS) payments – BCE amount revalued to 2014.
In the event of partial crystallisation, this will need to be added to other benefits to establish the value. Some of these details can take time to obtain, so the scheme should be contacted as a matter of urgency if there is any chance that the individual could be eligible.
Those who didn’t qualify for Individual Protection 2014 may qualify for Individual or Fixed Protection 2016, but there is no deadline for these applications as long as they remain eligible. That said though, it is important to establish the client’s level of lifetime allowance sooner rather than later if they are going to need to rely on these protections, especially Individual Protection 2016, because obtaining details from the scheme will be easier now than in a few years’ time.
Carry-forward relief
The payment of contributions in respect of carry-forward relief is an important consideration for higher and additional-rate taxpayers. An individual can only pay and get tax relief on contributions up to the annual allowance, which is £40,000 in 2016/17 if not affected by the tapered annual allowance. But provided the individual has been a member of a plan for the previous three years, and the full allowance was not used in that period, a contribution can be paid in the current year to use up the previous year’s relief under the carry forward rules.
For 2016/17, we would look to use up this year’s annual allowance before going back to 2013/14, 2014/15 then 2015/16. As 2013/14 was the last year to have an annual allowance of £50,000, it is quite likely there may be a higher amount to carry forward that will be lost if it is not used this year. With those affected by the tapered annual allowance, the full tapered amount needs to be used before carry-forward relief can be used.
However, as it can be very difficult to calculate the exact impact of the taper before the end of the tax year, having carry-forward relief available can create a buffer for those wanting to make additional contributions or for those who may have issues because of unpredictable final salary pension input amounts.
While not ideal, going over the annual allowance isn’t illegal or immoral, but it will mean the loss of upfront tax benefits on contributions. If the contributions are from an employer, it may also feel like a tax charge on the individual. It should be remembered though, that if they had received the payment in salary it would also have been taxed and subject to national insurance. The growth within the scheme will still be tax-free, too.
MPAA
For those affected by the MPAA, there is a change on the horizon that will mean their annual allowance for money purchase benefits drops by £6,000 from 6 April 2017. The Autumn Statement 2016 announced a consultation on how to implement a reduction in the MPAA from £10,000 to £4,000. Technically, this change will affect many people, but the government believes the level of contributions paid by those who are accessing their benefits is relatively low.
My experience differs slightly: the new flexibility of drawing benefits has encouraged more people to use their pension funds earlier in life when they are still working. That is why this change may be more of an issue for those who access their benefits earlier in life yet wish to continue to build funds for later life.
There are ways to access pension benefits without creating this unnecessary restriction. For example, a client could:
• Only access their PCLS.
• Draw money using the small pots rules.
• Remain within the capped drawdown regime.
• Use a standard annuity.
These clients will retain full access to the annual allowance in future, but will still be able to access some or all of their benefits now. However, should the client take even a single pound of income from a flexi-access drawdown plan, an uncrystallised funds pension lump sum payment or income from a flexible annuity, they will trigger the MPAA with immediate effect.
The MPAA applies from the date at which benefits are accessed flexibly and this can be any date in the tax year. So should the individual want to access benefits, delaying that access until after any substantial contributions are paid can avoid an annual allowance charge. This is likely to be particularly important if they are benefiting from pension contributions paid by an employer while accessing deferred benefits from a different scheme.
Carry-forward relief for money purchase contributions is also lost when the MPAA is triggered for previous years’ unused allowances and for any unused MPAA. This means it is even more important that any unused allowances are used before the MPAA is triggered to avoid an annual allowance charge.
Claire Trott is head of pensions strategy atTechnical Connection
