Brought in by former chancellor George Osborne, from 6 April 2016, the taper reduces the amount of tax-relief given on pension savings made by an individual or their employer gradually by £1 for every £2 of adjusted income over £150,000, and down to a minimum of £10,000.
Les Cameron, head of technical at Prudential, said there was no right answer for all but advisers should consider whether the benefit of making extra contributions outweighed the cost of the additional tax.
The problem for many advisers is the calculation of the income limits is complex and it includes all types of income including rental income and income from investments, some of which may not become apparent until after the tax year ends.
Despite this, a recent Prudential webinar, which was hosted with the Institute of Chartered Accountants in England and Wales (ICAEW), a survey of 100 participants showed 90 per cent believed it would be a mistake for people to opt out of a pension to avoid paying annual allowance charges.
At the same time 80 per cent believed the tapered annual allowance would lead to unexpected tax bills and 44 per cent regarded the rules to be unfair.
Mr Cameron said: “This survey provides a snapshot of how accountants and advisers regard the annual allowance, particularly the tapered annual allowance.
“Most people find it fiendishly complex and unlike the annual allowance and money purchase annual allowance it’s generally not possible for a pension scheme to know their member has exceeded the limit.
“The key point is the overwhelming agreement that you should think carefully before opting out of any pension provision simply to avoid a tax charge. Sometimes the net benefit still makes it worthwhile.”
John Gaskell, head of personal financial planning at ICAEW, appealed to advisers and accountants to work together when helping clients get to grips with the complexities around tax and pensions.
He said: “This is one area of financial planning where it’s generally not possible for either an accountant or a financial adviser to fully deliver the best client outcome on their own.
“Only by the professions working together can this be achieved, as they each bring their own area of specialism to the table.”
Alistair Cunningham, financial planning director at Wingate Financial Planning, said: “It's very difficult. For those who are in employment on fixed pay, without bonuses, and making regular contributions the calculations can be done in the tax year and the system can work.
“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
