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Playing Snakes and Ladders with the Annual Allowance

 

Remember the good old days when there was only one annual allowance?  Or perhaps you remember back even further, before the annual allowance was introduced.  Then along came ‘pensions simplification’ and with it, a limit on the amount of tax relievable pension savings that could be made into an individual’s pension(s) in a tax year.  Sounds simple enough, doesn’t it?  And for a while it was.  Admittedly it changed on a yearly basis, but so do a lot of tax rates, this didn’t really complicate things too much; it just made it a bit more difficult to plan ahead. 


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It was reduced drastically in April 2011 from £255,000 to £50,000, and then in April 2014 it was reduced further and became £40,000.  However, individuals were now able to carry forward any unused annual allowance from the previous 3 tax years – providing they had earnings to support the contribution and had been a member of a registered pension scheme in all of the relevant tax years.  Even if the individual didn’t have enough relevant UK earnings to support the contribution, they could always ask their employer to make the contribution on their behalf.  Although employee contributions are restricted by earnings, employer contributions are not.  Simple!

With the pension freedoms of April 2015, a new annual allowance was introduced that further restricted the amount of tax relievable pension savings that could be made once an individual had accessed their benefits ‘flexibly’.  Essentially, if anyone accessed their pension fund in a way that wasn’t available to them pre 06/04/2015 (also known as a trigger event), they would be subject to the Money Purchase Annual Allowance (MPAA) from the following day.  This also meant that they were no longer able to make use of carry forward of unused annual allowances from previous tax years.

Unless of course, the individual happens to also be a member of a defined benefit (DB)/final salary scheme.  In this case, they have an alternative annual allowance which will be the remainder of the £40,000 allowance after any MPAA allowance has been used.  Essentially, once someone has triggered the MPAA, their annual allowance is still £40,000 but the maximum amount they can contribute to any of their money purchase arrangements is £10,000.  Still fairly straightforward.  Well, kind of.

One of the positive points of the MPAA is that those who were in Flexible drawdown pre 06/04/2015 would convert to Flexi-Access drawdown and be rewarded with the £10,000 MPAA where they previously would have had no allowance.  Everyone’s a winner… right?

In 2015/16 there was an added bonus where in order to align Pension Input Periods (PIPs) to the tax year, and further simplify things, for any pension savings made into PIPs ending on or before 8th July 2015, the annual allowance was £80,000.  For the PIP 9th July – 5th April 2016, there was no annual allowance as such, but if the £80,000 had not been fully utilised, pension savings of the remainder of the £80,000 could be made, up to a maximum of £40,000.

On 6th April 2016, another allowance came into play.  The Tapered Annual Allowance.  This restricts back the annual allowance for those whose income is over a certain limit.  In order to determine whether an individual is subject to the tapered annual allowance, they will first need to work out their ‘adjusted income’ and ‘threshold income’ levels.  Note that if their threshold income is below £110,000, they will not be subject to the tapered annual allowance.  If their adjusted income is more than £150,000, their annual allowance will reduce by £1 for every £2 of income over the £150,000, subject to a minimum tapered annual allowance of £10,000. 

With all of the changes that have happened over the last 10 years, it’s not difficult to see why the Technical team at Sanlam get so many queries on all of the above.  The government have provided a couple of handy tools in order to help people trying to navigate the various allowances, which can all be found on the gov.uk website.  Nevertheless it is a difficult issue to navigate.  Hopefully the tapered annual allowance will be the last addition for a while.  Or will the Chancellor produce another snake at the Autumn Statement?  Watch this space… we certainly will be!

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 October 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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