Last Updated: 20 Sep 19 10 min read
The M&G Wealth Technical team delivered an online technical event covering the annual allowance. These are the questions and answers from the live event.
Q. Off topic - Would you prefer to fight one Gorilla sized Duck, or 10 duck sized gorillas?
A. Les was going with the gorilla sized duck as he reckoned he could outrun it in an emergency but then Mark pointed out ducks could fly. So, they have both gone for the 10 duck sized gorillas.
Q. In regard to DB is this only related to Active members? Or does the calculation for input apply to deferred members in DB schemes?
A. Yes, only active members have their inputs measured.
Q. Does the DB formula work for deferred member benefits or is the inflation increase basically just permitted and there is no use of the AA?
A.There is a “deferred member carve out” – deferred members do not have their inputs tested?
Q. Estimating the current tax years Pension Input Amount for a Final Salary Pension is relatively straightforward in the current tax year. However, how do you do this for a CARE Scheme? What about a client who is both a member of a CARE Scheme and has their Salary still linked to the FS Pension?
A. We agree! You need to follow the same process in effect which means understanding how the pension accrues in the CARE arrangement then using assumptions to estimate the amount. We suspect you are talking about public sector here and it’s near to impossible to get accurate due to the different moving parts. You have the accrual for the year, then inflation proofing of previous accrual and the scheme year runs form the 1st April so the inflation increases for the calculation and the increase for benefits is two different amounts at two different days.
You should also note that in the public sector with a CARE and active DB arrangement the AA amounts now get aggregated (the DB arrangement is often negative AA usage).
And finally, remember public sector previous input amount may change due to the public sector remedy (McCloud)
Q. Might have missed it at the start but how are salary sacrifice pension contributions treated for AA purposes?
A. Sacrifice arrangements are effectively giving up income for your employer to make a pension contribution for you. It is an employer pension contribution that is made. If the employer is passing on their National Insurance saving to the pension contribution, then it’s the total input made by the employer that uses annual allowance. As an example, if a member sacrificed £30,000 and the employer passes on all of their NI saving, the contribution would be £34,140.
If the tapered annual allowance is an issue and using the above figures the £34,140 would be included in the value of employer pension contributions. The sacrifice may affect the threshold income calculations if this was an arrangement entered into after 9 July 2015. If it was post the date, then the £30,000 sacrificed has to be added back into the threshold income calculation. If it was a sacrifice arrangement prior to this then the sacrificed amount doesn’t have to be added into the threshold calculations (but the value of the employer contributions will still count towards the adjusted income figures).
Q. Sorry, - checking I picked you up correctly. If you are no longer a member of your employer's DB pension scheme then even though those benefits will continue to grow until your pension, your deferred benefits don't use up your annual allowance?
A. Yes! As covered above.
Q. Annuity purchase doesn’t trigger the MPAA either?
A. Standard annuity purchases do not trigger the MPAA but a purchase of a post April 2015 flexible annuity does i.e. an annuity that is allowed to vary in a way that was not allowed prior to pension freedoms.
Q. Could you please clarify when you can qualify for the alternative AA and how you can use it?
A. It will mainly be used if the client is a member of a DB scheme after triggering the MPAA in reality. However, before a client triggers the MPAA it can be used by money purchase inputs in that year.
Q. We use a Flexible Pension Annuity (provided by London and Colonial), and they confirmed that as this is a lifetime annuity and they calculate the level of annuity payments every three years, this doesn't trigger the MPAA. Do you think that this is correct?
A. We have no reason to doubt them, but their answer would have been clearer by saying it is a flexible annuity but as it can only vary in a way that was allowable pre pension freedoms it does not trigger the MPAA. If the MPAA had been triggered by this, they would have had to have sent the member a notice that the MPAA had been triggered.
Q. Please can you explain again the carry forward allowance if the member exceeded their annual allowance for 23/24 and used carry forward for the previous 3 years. In 24/25 tax year, can they use carry forward again from 3 years prior to exceeding annual allowance?
A. You bring forward any unused allowance from the 3 previous tax years. The point being made is that if you have an excess over the allowance in the previous two years then you need to look back 3 years from those excess years to work out how much unused annual allowance there is free.
Q. Is carry forward using the unused available annual allowance despite what there Relevant UK earrings are? So, if there only had Relevant earnings of £10k in a given year and they contributed 10k into a pension then is there any annual allowance we can carry forward?
A. You can only use carry forward if you can exceed the standard or tapered annual allowance in any given year. If this is solely a personal contribution, then this by definition cannot exceed either as the member only has £10,000 of relevant income. Employer contributions are not limited to the salary of the member, so if an employer makes a contribution in excess of £50,000 and the member done £10,000 (assuming it’s the standard AA in play) then carry forward could be used.
Q. Please repeat the 3 consecutive years even if they were 10 years ago?
A. The point being made was you need to go back more than 3 years sometimes to accurately calculate carry forward. We have had a very rare occurrence when we had to look back 10 years. Once you have 3 excess free years you can stop.
Q. Are Benefits in Kind taken into account for the taxable income calculation?
A. Yes, if they are subject to income tax, they are included in total income.
Q. For the carried forward, if after the calculation it is clear that there is enough carried forward to cover the excess amount over the AA, does the client need to do anything when doing his tax return?
A. No, they will need to keep evidence that this was available should HMRC ever ask for evidence.
Q. I'm doing an annual allowance calc for a new contribution for client retiring this year. Where the WPS scheme is showing net employee contributions and employer contributions on the payment history, i do have to add tax relief to the calculations?
A. For pension inputs it is the gross amount of a pension that you have to add in. If it’s a relief at source scheme this is after the basic rate relief is added. So, a £8,000 net contribution becomes £10,000 after relief at source is added. It’s the £10,000 figure that is the AA usage.
Q. I had a client who is convinced that the budget will do away with higher rate relief, the day after the budget. But with relief at source and net pay arrangements, there is no way it could be introduced quickly? I'm not asking for your thoughts re the budget, but on the practicalities of changing it?
A. Implementation of a new method of pension tax relief will be complex and time consuming. It will also need consultation with industry. Schemes and providers would need a long lead in time to make changes. If there is a change in the budget in this area we would expect it to be anti forestalling arrangements prior to a future change.
Q. If someone gets made redundant and gets a lump sum package, we exclude the £30k tax free redundancy payment in terms of calculating income for the TAA? If their pension commences in the year we add that into the income though, right?
A. That’s correct, the first £30,000 of a redundancy payment is exempt from income tax and therefore not a component of total income. Pension income is subject to PAYE and therefore counts towards total income.
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