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

AA The annual Allowance (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 AA *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

MPAA The Money Purchase Annual allowance (MPAA) Applies when DC benefits are “flexibly accessed” Is currently £4,000.00 Measured over the PIP No carry forward MPAA

The mpaa Action Trigger 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

Tapered AA The tapered Annual Allowance Effective 6 April 2016 Adjusted income > £150,000 AND Threshold income > £110,000 Reduces AA £1 for £2 Minimum £10k allowance Tapered AA

The tapered annual allowance *For DB schemes this will be the pension input amount less employee contributions

Scheme pays

Scheme pays mandatory AND Cross-scheme tax charge greater than £2,000 PIA under scheme > standard AA (currently £40k)

Scheme pays advantages Feature “Adjustment must be just and reasonable” Tax relief LTA utilisation Actuarial adjustments (DB)

The calculation process

considerations Calculations Other factors COBs 19 General Regulatory

1 2 3 Member stays in 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

4 Compare outcome of 3 and 6 5 6 Member opts out Calculate value of deferred benefit (at retirement) Investment return. Revaluation rate 5 Identify value of alternate arrangements (if any) Investment return 6 Add deferred benefit value to value of alternate arrangements Compare outcome of 3 and 6

Case study

DB case study Meet Madhuri Age 52 NRD = 60 Pensionable pay = £65,000 Accrual rate = 1/60th 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

1 2 3 Db example madhuri stays in 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. Benefits in payment increase by 2% each year over 20 years

4 5 6 DB case study MADHuri leaves scheme Revaluation of deferred benefit £16,250 * 0.038= £599 Deferred benefits revalued by 3% Pension in payment revalued by 2% 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

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

Other factors

Wider considerations Dependants’ benefits Ill-health benefits Distribution of death benefits Public sector – “protections” Wider tax implications

considerations - madhuri 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

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

Regulatory

Regulatory “Client’s best interests” rule COBs 2.1.1R Is it a “pension opt out” ? COBs 19.1.1

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

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

“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

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

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