“For those self employed, with a variable bonus or irregular pension contributions, including final salary schemes, the figures are unworkable until after the tax year end, sometimes months after.
“The system is far too complex and I wonder if catching people out is part of the point.”
Annual allowance case study
Prudential compared a member of a defined benefit (DB) 1/60 scheme, with employee contributions of 6 per cent where the scheme pays the annual allowance charge, and a member of a defined contribution (DC) scheme, where the employer pays 6 per cent of the person’s salary as standard, and employee contributions are matched 1 for 1 up to 6 per cent. The scheme pays the annual allowance charge.
In this case study the client is a 45 per cent taxpayer with a salary of £210,000 (as such the annual allowance has been tapered to £10,000) and has no carry forward available.
The study shows the client of the DB scheme pays £6,930 net to generate an additional pension of £2,465 per annum and the member of the DC scheme generates an additional fund of £25,290 at the same net cost.
The test would be: would a client pay £x to get £y, Prudential said.
| Defined Benefit | Defined Contribution |
Pension accrued | £3,500 p.a. | £37,800 |
AA used | £56,000 | £37,800 |
AA excess | £46,000 | £27,800 |
AA charge | £20,700 | £12,510 |
Benefit reduction | £1,035 p.a. | £12,510 |
Post AA charge benefit | £2,465 p.a. | £25,290 |
Net cost | £6,930 | £6,930 |
carmen.reichman@ft.com
