Money purchase annual allowance 2015/16 and beyond

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Agnes Davis
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1 ADVISER FACTSHEET Tech Talk September 2015 Money purchase annual allowance 2015/16 and beyond In this Tech Talk the interactions between the money purchase annual allowance (MPAA) and the following are considered: Pension input period (PIP) alignment and the transitional rules for 2015/16 Tapered annual allowance from 2016/17 To aid understanding of this Tech Talk, it is advisable to first of all review the undernoted Tech Talks: Taxation of Pensions Bill: Money purchase annual allowance rules (updated) October 2014 Aligning pension input periods and the tapered annual allowance August 2015 The Finance Bill introducing these changes is currently making its way through the parliamentary process and poring over the relevant clauses and published explanatory notes does not make for light reading. With this in mind it is worth stressing that the content of this Tech Talk represents our interpretation of the information currently available. Contents Triggering the MPAA in the pre-alignment tax year Triggering the MPAA in the post-alignment tax year AA charge for 2015/16 Carry forward of unused AA to future tax years from 2015/16 MPAA and the tapered annual allowance Comment For professional advisers only

2 Triggering the MPAA in the pre-alignment tax year If the MPAA has been triggered in the pre-alignment tax year, the MPAA for the pre-alignment tax year is 20,000 and the alternative annual allowance (alternative AA) for this period is 60,000. In a tax year the money purchase pension input amount tested against the MPAA is referred to in legislation as the money purchase input sub total (MPIST). Pension input amounts from defined benefit arrangements and any pension input amounts from money purchase arrangements not tested against the MPAA in the tax year are taken into account when testing against the alternative AA. In legislation this is referred to as the defined benefit input sub total (DBIST). The Taxation of Pensions Bill: Money purchase annual allowance rules (updated) Tech Talk provides more detail on the MPIST and DBIST. The MPAA for the post-alignment tax year depends on the MPIST for the pre-alignment tax year: If the MPIST for the pre-alignment tax year was 20,000 or more, the MPAA for the postalignment tax year is nil If the MPIST for the pre-alignment tax year was greater than 10,000 but less than 20,000, the MPAA for the post-alignment tax year is 20,000 less the MPIST for pre-alignment tax year If the MPIST for the pre-alignment tax year did not exceed 10,000, the MPAA for the post-alignment tax year is 10,000 The alternative AA for the post-alignment tax year is nil, but any unused annual allowance from the pre-alignment tax year and any unused annual allowance from the three tax years immediately prior to 2015/16 can be used to increase this allowance. The amount available for carry forward to the post-alignment tax year from the pre-alignment tax year will be dictated by the input amount(s) in the pre-alignment tax year. There is a 40,000 cap on the amount available for carry forward. If the MPIST in the pre-alignment tax year exceeded 20,000, the cap reduces to 30,000. EXAMPLE 1 Paul triggered the MPAA on 1 June He is therefore subject to the MPAA for the pre-alignment and post-alignment tax years. His pension input amount for the pre-alignment tax year is 42,000, split 8,000 MPIST and 34,000 DBIST. He has no unused AA available from the three tax years immediately prior to the 2015/16 tax year. Pre-alignment tax year: MPAA = 20,000 and alternative AA = 60,000 Post-alignment tax year: MPAA = 10,000 and alternative AA = nil However, the alternative AA can be increased by any unused AA available from the pre-alignment tax year, which in this case is 38,000 ( 80,000-42,000). 2

3 EXAMPLE 2 Kate triggered the MPAA on 1 July Her pension input amount for the pre-alignment tax year is 42,000, split 14,000 MPIST and 28,000 DBIST. She has 10,000 unused AA available from the three tax years immediately prior to the 2015/16 tax year. Pre-alignment tax year: MPAA = 20,000 and alternative AA = 60,000 Post-alignment tax year: MPAA = 6,000 and alternative AA = nil However, the alternative AA can be increased by any unused AA available from the pre-alignment tax year and the three tax years immediately prior to 2015/16. These amounts are 38,000 ( 80,000-42,000) and 10,000 respectively, giving a total of 48,000. EXAMPLE 3 Steve triggered the MPAA on 1 May His pension input amount for the pre-alignment tax year is 42,000, split 22,000 MPIST and 20,000 DBIST. He has 15,000 unused AA available from the three tax years immediately prior to the 2015/16 tax year. Pre-alignment tax year: MPAA = 20,000 and alternative AA = 60,000 Post-alignment tax year: MPAA = nil and alternative AA = nil However, the alternative AA can be increased by any unused AA available from the pre-alignment tax year and the three tax years immediately prior to 2015/16. These amounts are 30,000 and 15,000 respectively, giving a total of 45,000. Note that the unused AA Steve has available from the pre-alignment tax year is not 38,000 ( 80,000-42,000). This is because he exceeded the MPAA in the pre-alignment tax year and the amount available for carry forward is therefore capped at 30,000. 3

4 EXAMPLE 4 Tina triggered the MPAA on 1 May Her pension input amount for the pre-alignment tax year is 62,000, split 22,000 MPIST and 40,000 DBIST. She has no unused AA available from the three tax years immediately prior to the 2015/16 tax year. Pre-alignment tax year: MPAA = 20,000 and alternative AA = 60,000 Post-alignment tax year: MPAA = nil and alternative AA = nil However, the alternative AA can be increased by any unused AA available from the pre-alignment tax year and the three tax years immediately prior to 2015/16. These amounts are 20,000 and nil respectively, giving a total of 20,000. Note that the unused AA Tina has available from the pre-alignment tax year is 20,000 ( 60,000-40,000) because she exceeded the MPAA in the pre-alignment tax year. Triggering the MPAA in the post-alignment tax year In what follows it is assumed that the individual was a member of a registered pension scheme at some point during the pre-alignment tax year. Where the MPAA is triggered in the post-alignment tax year, the MPAA is 10,000 and the alternative AA is nil. If the MPIST for the post-alignment tax year does not exceed 10,000, then the pension input amount for the post-alignment tax year is tested against a nil annual allowance plus any unused annual allowance from the pre-alignment tax year as well as any unused annual allowance from the three tax years immediately prior to 2015/16. Alternatively, if the MPIST exceeds 10,000, then this is tested against an MPAA of 10,000 and the DBIST for the post-alignment tax year is tested against a nil alternative AA plus any unused annual allowance from the pre-alignment tax year as well as any unused annual allowance from the three tax years immediately prior to 2015/16. EXAMPLE 5 Rico triggered the MPAA on 1 November His pension input amount for the pre-alignment tax year was 55,000. He has 36,000 of unused AA available from the three tax years immediately prior to 2015/16. If his MPIST for the post-alignment tax year does not exceed 10,000, then his pension input amount for the post-alignment tax year would be tested against a nil annual allowance increased by 61,000 made up of 25,000 from the pre-alignment tax year and 36,000 from the three tax years immediately prior to 2015/16. Alternatively, if his MPIST for the post-alignment tax year exceeds 10,000, then his DBIST for the post-alignment tax year would be tested against a nil alternative AA increased by 61,000. Because he has exceeded the MPAA ( 10,000) in the post-alignment tax year, Rico would be liable for an AA charge in respect of the 2015/16 tax year. 4

5 AA charge for 2015/16 Any excess from the pre-alignment and postalignment tax years will be added together for the purpose of calculating the AA charge for the 2015/16 tax year. Steve and Tina in Examples 3 and 4 above each have a 2,000 excess in respect of the pre-alignment tax year. Carry forward of unused AA to future tax years from 2015/16 Where the MPAA is triggered at some point during the 2015/16 tax year, the amount of unused AA (if any) available for carry forward to future tax years from 2015/16 will be the amount of unused AA from the pre-alignment tax year carried forward to the post-alignment tax year that is not used up in the post-alignment tax year. Let s look at the examples above to illustrate. EXAMPLE 1 (CONTINUED) Paul has 38,000 unused AA available from the pre-alignment tax year. Where his MPIST for the post-alignment tax year does not exceed 10,000: Unused AA available from 2015/16 is 38,000 less the pension input amount for the post-alignment tax year (nil where the Where his MPIST for the post-alignment tax year exceeds 10,000: Unused AA available from 2015/16 is 38,000 less the DBIST for the post-alignment tax year (nil where the EXAMPLE 2 (CONTINUED) Kate has 38,000 unused AA available from the pre-alignment tax year. Where her MPIST for the post-alignment tax year does not exceed 6,000: Unused AA available from 2015/16 is 38,000 less the pension input amount for the post-alignment tax year (nil where the Where her MPIST for the post-alignment tax year exceeds 6,000: Unused AA available from 2015/16 is 38,000 less the DBIST for the post-alignment tax year (nil where the 5

EXAMPLE 3 (CONTINUED) Steve has 30,000 unused AA available from the pre-alignment

Unused AA available from 2015/16 is 30,000 less the DBIST for the post-alignment tax

the pre-alignment Unused AA available from 2015/16 is 20,000 less the DBIST for the

AA available from the pre-alignment Where his MPIST for the post-alignment tax year

input amount for the post-alignment tax year (nil where the Where his MPIST for the

6 EXAMPLE 3 (CONTINUED) Steve has 30,000 unused AA available from the pre-alignment tax year. Unused AA available from 2015/16 is 30,000 less the DBIST for the post-alignment tax year (nil where the EXAMPLE 4 (CONTINUED) Tina has 20,000 unused AA available from the pre-alignment tax year. Unused AA available from 2015/16 is 20,000 less the DBIST for the post-alignment tax year (nil where the EXAMPLE 5 (CONTINUED) Rico has 25,000 unused AA available from the pre-alignment tax year. Where his MPIST for the post-alignment tax year does not exceed 10,000: Unused AA available from 2015/16 is 25,000 less the pension input amount for the post-alignment tax year (nil where the Where his MPIST for the post-alignment tax year exceeds 10,000: Unused AA available from 2015/16 is 25,000 less the DBIST for the post-alignment tax year (nil where the 6

7 MPAA and the tapered annual allowance The Aligning pension input periods and the tapered annual allowance Tech Talk touched briefly on the interaction between the MPAA and the tapered AA. The examples below are designed to show how the interaction works in practice. EXAMPLE 6 Sadie s adjusted income for the 2016/17 tax year is 180,000 and her threshold income exceeds 110,000. Therefore, she is subject to a reduced AA in that tax year of 25,000. She also triggered the MPAA in 2016/17 and has unused AA of 12,000 available from the three tax years immediately prior to 2016/17. a) Assume that her MPIST and DBIST for the 2016/17 tax year are 7,000 and 33,000 respectively. As she did not exceed the MPAA in the tax year, her pension input amount for 2016/17 ( 40,000) is tested against her reduced AA of 25,000 increased by 12,000. Therefore, she is liable for an AA charge on the 3,000 excess. b) Assume that her MPIST and DBIST for the 2016/17 tax year are 14,000 and 26,000 respectively. As she exceeded the MPAA in the tax year, the taper applies to the alternative AA of 30,000. This reduces the alternative AA to 15,000 in the tax year. The AA test works as follows: 14,000-10,000, giving an excess of 4,000 26,000 ( 15, ,000), giving a nil excess Note that the unused AA from the three tax years immediately prior to 2016/17 is added to the reduced alternative AA for the purposes of the test. Under these circumstances Sadie is liable for an AA charge on the 4,000 excess. In a tax year where the MPAA and tapering apply, if the MPAA is not exceeded in the tax year, the amount of unused AA available for carry forward to future tax years is calculated as follows: Tapered AA less the pension input amount (nil where the Alternatively, if the MPAA is exceeded in the tax year, the amount of unused AA available for carry forward to future tax years is: Tapered alternative AA less the DBIST (nil where the 7

EXAMPLE 7 Ali s adjusted income for the 2017/18 tax year is 160,000 and his threshold income exceeds 110,000.

He is also subject to the MPAA in 2017/18.

Amount of unused AA available from 2017/18 for carry forward to future tax years is: 35,000-10,000 = 25,000

8 EXAMPLE 7 Ali s adjusted income for the 2017/18 tax year is 160,000 and his threshold income exceeds 110,000. Therefore, he is subject to a reduced AA in that tax year of 35,000. He is also subject to the MPAA in 2017/18. a) Assume that his MPIST and DBIST for the 2017/18 tax year are 10,000 and nil respectively. Amount of unused AA available from 2017/18 for carry forward to future tax years is: 35,000-10,000 = 25,000 b) Assume that his MPIST and DBIST for the 2017/18 tax year are 14,000 and nil respectively. Amount of unused AA available from 2017/18 for carry forward to future tax years is: 25,000 (the tapered alternative AA) nil = 25,000 8

Measures, such as the MPAA and the tapering of the AA, therefore introduce a level of complexity into the pension tax system that few in the industry are likely to welcome.

9 Comment Pension flexibility is a good thing in that it gives individuals greater control over their pension savings. Unfortunately, it has been introduced at a time when debt and deficit reduction inform the policy making decisions of government. Also, the government does not want pension flexibility to be abused. Measures, such as the MPAA and the tapering of the AA, therefore introduce a level of complexity into the pension tax system that few in the industry are likely to welcome. One of the principles underpinning the government consultation on the reform of pension tax relief is that any new system be simple and transparent. The current system fails in this regard and therefore may lead to many respondents calling for it to be radically overhauled. Therefore, we await the outcome of the consultation with great interest. Further information John Dunn Pension Specialist Technical Support Unit Visit the Technical Hub for further information: Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay Partnership cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue & Customs practice are subject to change. The tax treatment depends on the individual circumstances of each client. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 3rd Floor, 37 Esplanade, St Helier, Jersey, JE2 3QA. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL, UPT and UPTL have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Conduct Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FCA. Therefore, IPS and IPS Plc are not regulated by the FCA in relation to these schemes or services.(01/14) JHSTT 02 SEP15 LD 9

Aligning pension input periods and the tapered annual allowance

ADVISER FACTSHEET Tech Talk August 2015 Aligning pension input periods and the tapered annual allowance Pension input periods are an important part of the annual allowance. Changes to the annual allowance