1. ANNUAL ALLOWANCE WHO’S AFRAID OF THE BIG BAD tax CHARGE?

2. 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.

3. Annual, money purchase and taper allowance
a refresh

4. 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, an additional restriction applies to individuals who have taken benefits flexibly

5. 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

6. 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

7. 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

8. 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

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

10. Scheme pays

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

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

13. The calculation process

14. considerations
Calculations
Other factors
COBs 19
General Regulatory

15. 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

16. 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

17. Case study

18. 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

19. 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

20. 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

21. 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

22. Other factors

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

24. 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

25. 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

26. Regulatory

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

28. 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

29. 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

30. “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

31. 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

32. 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