ANNUAL ALLOWANCE WHOS AFRAID OF THE BIG BAD
ANNUAL ALLOWANCE WHO’S AFRAID OF THE BIG BAD TAX CHARGE?
LEARNING OBJECTIVES At the end of this session you’ll have an understanding of: • how the annual, money purchase, and tapered allowances work. • the operation and advantages of “scheme pays”. • how to calculate whether an opt-out is suitable. • other factors impacting suitability. • regulatory requirements.
ANNUAL, MONEY PURCHASE AND TAPER ALLOWANCE A REFRESH 3
THE ANNUAL ALLOWANCE (AA) AA • £ 40, 000* • Charge on pension input amount (PIA) exceeding AA in the PIP • PIPs now aligned with tax years • PIA: • DC = contributions paid • DB = growth in benefits over PIP *For those with taxable incomes not exceeding £ 150, 000. 00 an additional restriction applies to individuals who have taken benefits flexibly
CARRY FORWARD Up to 3 years of unused AA Member of a pension scheme in the relevant year Current year’s AA first…. . then earliest year No offset against money purchase AA
THE MONEY PURCHASE ANNUAL ALLOWANCE (MPAA) MPAA • Applies when DC benefits are “flexibly accessed” • Is currently £ 4, 000. 00 • Measured over the PIP • No carry forward
THE MPAA Action Take PCLS only (FAD) Take PCLS and income (FAD) Take UFPLS Remain in capped DD Exceed GAD in capped DD Take annuity/scheme pension Take “small pots” less than £ 10, 000 Trigger
THE TAPERED ANNUAL ALLOWANCE Tapered AA • Effective 6 April 2016 • Adjusted income > £ 150, 000 AND • Threshold income > £ 110, 000 • Reduces AA £ 1 for £ 2 • Minimum £ 10 k allowance
THE TAPERED ANNUAL ALLOWANCE *For DB schemes this will be the pension input amount less employee contributions
SCHEME PAYS 10
SCHEME PAYS MANDATORY Cross-scheme tax charge greater than £ 2, 000 AND PIA under scheme > standard AA (currently £ 40 k)
SCHEME PAYS ADVANTAGES Feature “Adjustment must be just and reasonable” Tax relief LTA utilisation Actuarial adjustments (DB) 12
THE CALCULATION PROCESS 13
CONSIDERATIONS • Calculations • Other factors • COBs 19 • General Regulatory
MEMBER STAYS IN 1 • Calculate value of benefits now/at retirement • Contributions/investment returns 2 • Calculate cost of remaining in scheme • Rate of tax relief 3 • Calculate benefits net of any tax charge • Scheme pays arrangements/factors 15
MEMBER OPTS OUT 4 • Calculate value of deferred benefit (at retirement) • Investment return. Revaluation rate d f 5 n a 3 o • Identify value of alternateearrangements (if m any) o c t u • Investment return eo r a p m o C deferred benefit value to value of • Add 6 6 alternate arrangements 16
CASE STUDY 17
DB CASE STUDY Meet Madhuri • • Age 52 NRD = 60 Pensionable pay = £ 65, 000 Accrual rate = 1/60 th 15 years’ service at 1/4/18 Employee contribution = 8% £ 3, 500 pay rise effective April 18 £ 4, 500 pay rise backdated to 1/7/17 • No carry forward 18
DB EXAMPLE MADHURI STAYS IN 1 • Uprated benefits at 6/4/18 (£ 65, 000*15/60)*1. 03 = £ 267, 800 • Gross pension rights now = £ 16, 250 2 • Net cost to Madhuri of remaining in scheme • (£ 73, 000*8% + £ 4500*9/12*8%)*60% = £ 3666 • Madhuri receives tax relief at 40% 3 • • Rights at 5/4/19 - £ 73000*16/60 = 19, 467 Pension input = £ 43, 667 AA charge = £ 1, 467 Increase in pension rights = £ 3, 217 Assumptions: Madhuri has pay-rises of 1% from April 2019. 19 over 20 years Benefits in payment increase by 2% each year
DB CASE STUDY MADHURI LEAVES SCHEME 4 • • 5 • Value of alternate strategy – contribution invested in PP for 8 years • £ 9, 027 • Net investment return assumed to be 5% 6 • Value of alternate strategy + value of deferred pension • £ 9, 027 PP plan + extra £ 599 DB pension Revaluation of deferred benefit £ 16, 250 * 0. 038= £ 599 Deferred benefits revalued by 3% Pension in payment revalued by 2% 20
MADHURI – OUTCOME COMPARISON Stay in scheme Opt out + strategy Value in 8 years DB Pension £ 3217 DB Pension £ 599 + PP £ 9, 027 Net cost to Madhuri £ 5, 133 £ 3, 666 21
OTHER FACTORS 22
WIDER CONSIDERATIONS • Dependants’ benefits • Ill-health benefits • Distribution of death benefits • Public sector – “protections” • Wider tax implications 23
WIDER CONSIDERATIONS - MADHURI Madhuri leaves her DB scheme: • Dependants benefits: • Spouse’s pension reduces • Lump sum death benefit reduces • But spouse could inherit PP • Ill health retirement • No enhancement • PP – IHT status of death benefits 24
A RECOMMENDATION FOR MADHURI Stay in scheme Opt out + strategy Value in 8 years DB Pension £ 3217 DB Pension £ 599 + PP £ 9, 027 Net cost to Madhuri £ 5, 133 £ 3, 666 RECOMMENDATION: Remain in DB scheme. Regular reviews 25
REGULATORY 26
REGULATORY “Client’s best interests” rule COBs 2. 1. 1 R Is it a “pension opt out” ? COBs 19. 1. 1 27
PENSION OPT OUT UNDER COBS 19. 1. 1 Opt out from: Occupational/GPP/GSP to which employer contributes OR Decline to join: Occupational/GPP/GSP to which employer contributes AND Opt out is “in favour of” a PP or SHP AND Opt out relates to (potential) safeguarded benefits 28
OPT-OUT UNDER COBS 19. 1 Requirement Starting assumption = opt out not suitable Clear demonstration that the opt-out is in the client’s best interests. Given or checked by pension transfer specialist (GARs excepted) Ensure transfer specialist checks and confirms advice Adequacy of information – firms working together Execution only – record that no recommendation made Suitability report must contain: • Advantages/disadvantages of recommendation • Analysis of financial implications of opt-out • Summary of other material information Advice not to proceed must be given in writing 29
“IN THE CLIENT’S BEST INTERESTS” • Client’s intentions • Attitude to/understanding of risk of giving up safeguarded benefit • Attitude to/understanding of investment risk • Realistic retirement income needs 30
PLANNING POINTS • Ensure clients understand payment of a tax charge is not always a bad thing • Consider eligibility for mandatory/voluntary scheme pays • Processes for opt-out recommendations which do/don’t fall under COBs 19. 1 • Always consider the wider factors 31
LEARNING OUTCOMES At the end of this session you will have an understanding of: • Consider how the annual, money purchase, and tapered allowances work and the charges applicable. • Evaluate how “scheme pays” works and the benefits for the client. • Illustrate the different considerations which are applicable in an annual allowance scenario • Differentiate the regulatory impact of the options for the client
THANK YOU
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