Six things you probably know, but might have forgotten as we approach the tax-year end
As we approach the end of the current tax-year (where did the last 12 months go?) it’s a useful time to remind ourselves of some of the changes which will be ushered in on 6th April. It’s also the perfect opportunity to recap some of the more general tax planning opportunities offered by Self-Invested Personal Pensions (SIPPs).
Of course, you probably already know each of these, but we find a gentle reminder from time to time is always useful. So, here’s our recap of the six things you probably knew but are worth reminding you about.
1. Lifetime Allowance (LTA) increase
The LTA is pegged to the Consumer Price Index (CPI). It was expected to rise from 6th April 2019 to £1,054,800, however, the government has sensibly rounded this to £1,055,000.
2. Unused annual allowances
As always, the new tax-year sees the loss of any unused Annual Allowance from three years earlier; in this case 2015/16.
If your client plans to build up wealth in his or her pension, this is something you may want to consider. There’s probably just enough time to nudge clients into making last-minute contributions before a valuable allowance is lost forever.
3. Goodbye to Pre / Post Alignment PIP for 2015/16
When considering Carry Forward contributions, 2015/16 saw the pension input period split into pre and post alignment years to ensure future alignment with the tax years. Consequently, 2018/19 is the last year where this split of the pension input period will need to be considered.
Speaking on behalf of advisers, clients and ourselves, this issue has been the source of some confusion over the past few years, so we are happy to see the back of it!
4. The Money Purchase Annual Allowance (MPAA) trap
The MPAA was reduced from £10,000 to £4,000 in April 2017. Despite being a well-publicised change, it’s still catching some clients out.
As you know, it only applies once a client has drawn an income from a flexible arrangement; this includes taking income from a Flexi-Access Drawdown (FAD) arrangement or from Flexible Annuities. However, unlike the Annual Allowance, the MPAA cannot be carried forward. We often find this catches people out if they have taken a lump sum but are still planning to make further contributions.
5. Tapered Annual Allowance confusion
There’s little doubt that the Tapered Annual Allowance rules are among the most confusing changes to pension legislation in recent years. The complexity is particularly acute for clients with an adjusted income in excess of £150,000, which of course includes employer contributions.
As a reminder:
- From the 2016/17 tax-year. a tapering of the Annual Allowance was introduced for people who have an ‘adjusted income’ of over £150,000 or more
- For every £2 over the £150,000 threshold, the Annual Allowance is reduced by £1 to a minimum of £10,000
- ‘Adjusted income’ is all taxable income (dividends, rental income, salary etc.) and including any pension contributions made by an employer on the employees’ behalf
Total Adjusted Income Annual Allowance
Up to £150,000 £40,000
For example, if an individual has earnings of £120,000, an employer pension contribution of £40,000 would give rise to an Annual Allowance charge, as the total adjusted income would be £160,000, thus reducing this individual’s Annual Allowance to £35,000.
6. Auto-enrolment dangers
In years to come, we may well look back on Auto Enrolment and consider it to be the biggest change to retirement provision since the introduction of the State Pension way back in 1909.
However, there are unintended consequences. For example, if a client originally opted out because they had certain protections from the Lifetime Allowance, then the three-year trigger for them to opt out again will soon be approaching. By not opting out and accruing benefits in an auto-enrolment scheme this protection could be lost. That’s potentially a very expensive mistake.
A useful reminder?
We hope these reminders have been helpful. As we compiled the list we couldn’t help looking back to ‘A Day’ in 2006, also dubbed, ‘pension simplification’ with a wry smile; whatever happened to that concept?
Nevertheless, complexity brings opportunity; for your clients to invest, tax-efficiently and for you to add value, helping them take advantage of the rules to secure their financial future and that of their family.
Of course, if you need our help or just a second opinion, we are here and happy to help.