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Technical View

Technical View: May 2016

 

In this month’s Technical View we have a look at some of the questions the Sanlam Technical team have received relating to pensions, and in particular the tapered annual allowance, carry forward of unused allowances and the reduction in the standard lifetime allowance (LTA).

Question 1


A client who has a deferred pension from the Teachers Pension Scheme (TPS) started to pay into a personal pension in tax year 2015/16. He ceased contributions to the TPS approximately 10 years ago. 
 
Can this client carry forward his pension contributions from tax years 2013/14 and 2014/15 using his previous scheme membership of the TPS?
If his income for tax year 2016/17 (including dividends) is in excess of £200,000, will his annual allowance be reduced to £10,000?

Answer 1


Membership of a registered pension scheme for carry forward purposes includes being a deferred member so your client may carry forward any unused annual allowance from up to 3 previous tax years.
 
The tapered annual allowance, (introduced 6/4/2016) would mean that if your client’s total adjusted income is £200,000, his tapered annual allowance will be £15,000. It reduces to £10,000 for adjusted income of £210,000 and more.
 
Adjusted income only needs to be calculated where threshold income exceeds £110,000. This is normally calculated as net income for the year, less the amount of certain lump sum death benefits paid during that tax year and less gross pension contributions paid under the relief at source system.

Adjusted income is broadly:

  • net income; plus

  • any relief under the net pay system (i.e. it's added back in; plus

  • any relief on making a claim; plus

  • relief claimed by non-domiciled individuals to overseas pension schemes, plus

  • the value of any employer contributions for the tax year **; less

  • any lump sum death benefits received which is subject to tax because the deceased died at age 75 or more. 

**For defined benefit schemes, employer contributions will be the pension input amount for the scheme for the tax year less any member contributions paid.

For more information see the Pensions Tax Manual (section PTM057100) on how to calculate threshold income and total adjusted income. Further useful details on the annual allowance tax charge are available here


Note: It is still possible to carry forward any unused annual allowance in conjunction with the Tapered Annual Allowance. 

Question 2 


A client with relevant UK earnings of £35,000 and income from other sources (rental and dividends) of £160,000 is looking to make a gross contribution of £25,000 to their personal pension this tax year.
 
What is the position relating to:

  1. The tapered annual allowance for people with income in excess of £150,000
  2. The potential carry forward that could be used. 

Answer 2


To determine the available annual allowance for the individual in the current tax year, you will first need a clear understanding of their ‘adjusted income’ (see the definition in Q1). If the client’s relevant UK earnings are £35,000, but their adjusted income is £195,000, they will have a tapered annual allowance for the 2016/17 tax year of £17,500. 
 
So, in order to make a tax-relievable contribution of £25,000 they could maximise this year’s annual allowance and then potentially carry forward unused allowance of £7,500 from the previous 3 tax years, using the earliest tax year first (for the 2016/17 tax year, this will be 2013/14). This would of course depend on other factors such as the amount of pension savings made into pension input periods in the earlier tax years.
 
You may find it useful to have a look at the recently updated Pensions Tax Manual which now includes a section on carrying forward and the tapered annual allowance.

Question 3


My client has a deferred pension of around £47,000pa payable from age 60 in a Defined Benefit scheme, which he left in 2010, and a current Money Purchase scheme with a value just over £83,000. Should he elect for Individual or Fixed Protection as it appears that the value of his combined benefits is over £1million?

Answer 3


The DB pension of £47,000pa is the pension payable from age 60. For 2016 transitional protection purposes the capital value will be based on the DB pension as at 5 April 2016. This will be 20 x the pension at date of leaving pensionable service in 2010, revalued up to 5 April 2016.
 
The Individual Protected amount will be the total value of uncrystallised funds as at 5 April 2016, subject to the minimum of £1 million (Below £1m there is no need for protection as the standard LTA = £1m)
 
Working on this basis it is unlikely that the aggregate of your client’s pension savings will equate to £1m at 5 April 2016 and so Individual Protection 2016 may not be an option.
 
Fixed Protection 2016 could be an option (but only if pension contributions ceased before 6/4/2016) but some points may need to be considered. For example:

  • Is a taxed benefit better than no benefit?

  • How this affects the client will depend on the client’s own personal circumstances. Should pension contributions cease if this prevents a lifetime allowance tax charge being incurred? Maybe, but is this a bad thing if the net returns from a pension are better than elsewhere?

  • Would the employer offer other forms of remuneration in place of a pension?

  • If the client opts out, will he lose death in service benefits? 

The first edition of our Special Feature Technical View outlines some of these points and you can read this here.  
 
We hope this edition has provided some clarity on queries you might be having with your clients. For further information on the content of this please feel free to contact the technical team on technical@sanlam.co.uk where we will try and assist with your query.
 

Date Issued: 11.5.16

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at May 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.
 
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