Pension Contributions and Annual Allowance

Pension Contributions and Annual Allowance This topic is a must know for success in any pension exam. It is even more important now, because you have three AA regimes: normal AA ; MPAA and Tapered AA for 2017/18 tax year. There are effectively 5 AA/contribution regimes we must know and understand to enable us to apply into complex case studies: one for those accruing benefits and not accessed their pension options and one for those who have accessed flexible pension options (MPAA). There is then a further split between money purchase and defined benefit accruals and whether you are dealing with pre/post 2015/16 year AND then further complicated by the Tapered Annual Allowance (further topic). This has been updated with examples and a short summary of the tapered AA rules for 2017/18 (for practicing advisers who will need to understand the consequences for their clients). This is becoming a big subject and almost as complicated as pre-a day regimes. And not much (at all) has changed for the 2017/18 tax year: two key points 1. CPI measure for 2017/18 calculations is 1.0% 2. MPAA is 4,000 for the 2017/18 tax year. Changes in the annual allowance (AA) since 2011/12 have led to many more individuals being caught by the AA charge. To both avoid tax charges and to take advantage of the ability to carry forward unused AA, it is important to have a good grasp of the rules to ensure your clients are advised appropriately both in the exam and in your day job. Within the lesson are both learning tutorial videos and question and answer video tutorials, which will allow you to apply your knowledge into a client case study - and check your understanding against the model answer. Topics Pension Contributions and Annual Allowance Money Purchase Annual Allowance (MPAA) Tapered Annual Allowance Defined Benefit Pension Input Amount Excess Annual Allowance Tax Charges Copyright 2017-2018 Expert Pensions Limited, All Rights Reserved

Pension Contributions and Annual Allowance Contributions can be paid by the member, a third party on behalf of the member or a member s employer or former employer. Where a contribution is paid by a third party this is always treated as if it were paid by the member themselves as NET (of 20%) contributions. The third party can be an individual or a corporate (normally an employer or former employer). A member (of a registered pension scheme) or 3 rd party can make unlimited contributions during any tax year. To qualify for tax relief (as a member contribution) the contribution must be a relievable pension contribution made by a relevant UK individual (which means that they have relevant income chargeable to UK income tax) or by a third party on behalf of the individual (even for former employees by employers). It won t be if it s paid after the member has reached age 75 or is paid by employer (or they have started flexible drawdown under current rules). Individuals can contribute to any number of registered pension schemes but will only receive tax relief on their contributions if they are a relevant UK individual. A relevant UK individual is someone under the age 75 who, in respect of a tax year, meets at least one of the following criteria: Has relevant UK earnings chargeable to income tax for that year; UK resident during that year; UK resident both when they became a member of the pension scheme AND at some time during the five tax years immediately prior to the year in which the contribution was made; Individual or Spouse, have earnings from an overseas Crown employment subject to UK tax. Relevant UK earnings include: Employment income: salary, wages, bonuses, overtime and commission Taxable profits for the self-employed Income arising from patent rights and treated as earned income Earnings from an overseas Crown employment, subject to UK tax. Dividends are NOT included in the definition of relevant UK earnings. 2

A relevant UK individual is eligible to receive tax relief on personal contributions up to a gross value which is the greater of 3,600 p.a. or 100% of relevant UK earnings, subject to limits imposed by the annual allowance (and lifetime allowance rules). Large employer contributions As for the employer, you can take it that pension contributions (for both individuals and schemes) will normally pass the wholly and exclusively test and qualify for tax relief, as the starting point for the HMRC it will be rare that it doesn t (except in cases of abuse). So, it s a yes, unless otherwise told, corporation tax relief will apply. For larger contributions, tax relief on employer contributions to a particular scheme will be spread if, the employer contributions: 1. Exceed 210% of the contributions they made to the scheme in the previous chargeable period, and 2. Amount of the relevant excess is 500,000 or more, where the relevant excess is any amount paid over and above 110% of the contributions in the previous chargeable period. 3. The tax relief is spread over 2 years ( 500k- 1M excess), 3 years ( 1-2M) or 4 years ( 2M+). Here s an example of a large increase in Employer (ER) contributions and the steps to take in the calculation: Example 1.1.1. Last period: pension contribution of 300,000 This period: pension contributions 1M? What s the tax relief in the next period? You can see there was a large increase in contributions, but how much have they increased and would it mean spreading in this example? Step 1: Quantify both the increase and the relevant excess: 1. Increase: the payments in this period were more than 210% of the previous year's contributions: 210% x 300,000 = 630,000, so 1M is greater than 210% increase. This rule is satisfied, so progress to the next part 3

2. Calculate the relevant excess: = [ 1M - ( 300,000 x 110% = 330,000)] = 670,000 Here the relevant excess is greater than 500,000 (it is 670,000) and therefore spreading of ER tax relief will happen. This means that not all the larger ER contribution will get immediate tax relief in this period (the HMRC prefers to spread the tax relief of these large pension contributions). Step 2: How many years spreading? The relevant excess is over 500,000 and tax relief is spread over two years. Remember the figures: the tax relief is spread over 2 years ( 500k- 1M excess), 3 years ( 1-2M) or 4 years ( 2M+) Step 3: How are the contributions spread? The relevant excess is spread over two years (in the above example) in this way: 670,000 /2 = 335,000 spread over 2 years, which means the contribution will be split for tax relief purposes: 335,000 on each of this period and the next period. The tax relief is spread over 2 years: a) This period the total tax relief on contributions being ( 330,000 + 335,000); this is 110% of previous year plus 50% (spread over 2 years) of the relevant excess (which was 670,000). b) The next period, 335,000 is eligible for tax relief, in addition to anything else in that period. Individual contributions A limit on the tax relief available for total pension input amount (PIA) (made by, or for a member) to registered pension schemes for a full tax year. If the total pension input amount (PIA) is more than the annual allowance (AA), there could be an annual allowance tax charge. The annual allowance is 50,000 (gross) for tax years 2011/12, 2012/13 and 2013/14. From tax year 2014/15, the annual allowance is reduced to 40,000 (gross total contribution, without going into too much detail about the pre and post alignment details from 2015/16, at this stage). 4

As we discussed at the outset of this module, Individuals (UK relevant individuals who are resident in UK and/or have relevant UK earnings charged to UK tax) can make contributions to registered pension schemes, and in any tax year are eligible for UK tax relief up to the higher of: 3,600, and 100% of their relevant UK earnings for that tax year but, the annual allowance also needs to be considered as a cap on the amount of tax relief. So, in summary, if you are UK resident and have eligible earned earnings (not dividends or savings income, for example), on which you paid UK tax, you could get tax-relief. Net pay method (of contributions/tax relief) Net pay only applies to occupational pension schemes; this is a gross from gross method: the employer deducts gross contributions from gross pay before PAYE income tax and the employee gets tax relief immediately. You may be aware of the current controversy surrounding net pay arrangements for low earners, who are not getting any tax relief on contributions into master trust schemes used for AE, because they don t earn enough to pay any tax, they don t receive any tax relief. Of course, the governance of master trusts have also been the subject of much debate and a new Pensions Bill will strengthen the governance and use of master trusts. Relief at source The relief at source (RaS); individual contributions are made net (of basic rate tax (BRT), from net pay. This is a net from net method. Any additional Higher or additional rate tax relief on contributions is given by increasing the basic rate band (and higher rate band, if applicable) by the amount of the gross contribution when calculating the amount of total tax due on self-assessment (at the end of the tax year). One thing worth watching for is losing the personal allowance if adjusted net income (income after deductions or pensions or charitable giving) goes over 100,000. It's reduced by 1 for every 2; in 2017/18, the 11,500 personal allowance will completely disappear when their adjusted net income reaches 123,000. But making a pension contribution (and reducing the net adjustable income) you can get the personal allowance back, meaning tax relief up to 60% (and more). This may appear straightforward, but in recent years this has been a popular subject in pension exams and has been asked regularly. Being aware and being able to explain how the tax relief is awarded and the impact on each, on different types of client is a key part of the syllabus. Relief at source is also the way in which tax relief is given through personal pensions (PP and/or SIPP) and the method which is usually used to contract the benefits of salary sacrifice. 5

Overseas If the employee still has relevant UK earnings, their personal contributions may continue as when they were UK resident. But, if they no longer have relevant UK earnings, relievable contributions will be limited to 3,600 a year for the five tax years after the one in which they leave the UK. Basically, no earnings paying tax, no tax relief. IHT And finally, a question often asked about paying contributions and IHT consequences: in short, it won't normally have IHT implications. But, if someone makes a contribution or makes a transfer when they know they're in poor health, the HMRC may assess them for IHT against what would effectively be an IHT chargeable transfer (CLT). There are even providers who have stopped taking DB TVs if the client expects to die in next two years. They are also holding back 40% of the Death benefits if a client does die in the 2 year time frame in case there is a tax claim. One key thing about these DB TVs (in cases where there is a living spouse) is this: This is the loss to the estate. As it is a transfer of value, there is no spousal exemption available so IHT would be payable on any amount over 325,000. The knock on impact is then the nil - rate band being fully used by the pension transfer with the increased IHT on the rest of the member's estate and/or the loss of the transferrable nil - rate band to the spouse for use on second death. However, referring back to the old two year rule; if you survive two years and you didn t know/expect to die at the time of the action, it ll probably be ok. When assessing for any potential IHT, the same principle applies when dealing with transfers; PP to PP money purchase transfers shouldn t be an issue (there is no gratuitous intent or possible gain from those transfers), but with defined benefit pension scheme transfers within 2 years of death, it could be a significant factor in any IHT assessment and should have be covered at point of transfer and in the suitability report. 6

Money Purchase Annual Allowance (MPAA) As previously discussed, a limit on the tax relief available for total pension input amount (PIA) (made by, or for a member) to registered pension schemes for a full tax year. If the total pension input amount (PIA) is more than the annual allowance (AA), there could be an annual allowance tax charge. The annual allowance is 50,000 (gross) for tax years 2011/12, 2012/13 and 2013/14. From tax year 2014/15, the annual allowance is reduced to 40,000 (gross total contribution). You should also consider this normal AA, in the context of the MPAA limit for 2017/18 and beyond of 4000 AA test What's tested against the annual allowance for a particular tax year is the total pension input amount (PIA); this is the sum of all pension input amounts made within pension input periods which for 2017/18 are now all fully-aligned with the fiscal tax year (this change occurred as of 6/4/16). The calculation of the pension input amount depends on the type of scheme: Money purchase schemes - it's the total pension contributions made during the pension input period by the member personally and/or on their behalf by their employer or any third party - regardless of whether tax relief has been given on those contributions. (Contracted-out rebates ignored, no longer applicable.) Defined benefits schemes - it's the value of the increase in pension benefits from the start of the period to the end of the PIP. Where total PIA is more than the AA allowable, they'll normally face a tax charge on the excess (there are some exemptions), but it's possible, in certain circumstances, to carry forward unused annual allowance from the previous three tax years to offset this charge. This is primarily the format of pension exam questions: application of the AA rules into a case study, with calculations and specific client explanations/implications. 7

Important notes about pension input periods (PIPs) Historically, if the PIP started after 6 April 2011, (in PP arrangements) it would end automatically at end of tax year (5 April). This aligns PIPs with the tax year for new arrangements from 6 April 2011. This was unless a different date was nominated by the member or the plan was started before 6 April 2011, in which case the PIP could have been any date within the tax year. And, of course, defined benefit pension schemes/occupational arrangements, they could have chosen any date for the PIP. All pension input periods open on 8 July 2015 will end on 8 July 2015 The next pension input period will be 9 July 2015 to 5 April 2016 for these arrangements and ALL arrangements will have a new PIP for the new tax year starting on 6 April 2016. For new arrangements that have their first pension input period starting on or after 9 July 2015 and on or before 5 April 2016, the pension input period will start on the normal commencement day and will end on 5 April 2016. All PIPs from 8 July 2015 will end on 5 April 2016. Pension input periods will continue to exist from 6 April 2016, but they will be aligned with the tax year. From 6 April 2016, all existing arrangements will have a 12-month pension input period from 6 April 2016 to 5 April 2017. All subsequent pension input periods will be for the period 6 April to 5 April. It will not be possible to vary this pension input period. Special rules for 2015/16 were introduced, until 6 April 2016. Transitional rules have been introduced to give a total AA limit for the period to 8 July 2015 of 80,000 and protected from any annual allowance charge. This is the pre-alignment year. However, if that AA contribution limit of 80,000 hasn t been used in the period from 6 April 2015 to 8 July 2015 (the pre-alignment year), the balance of any unused savings can be carried forward to the period 9 July to 5 April 2016, the post alignment year, to a maximum of 40,000. Effectively, everyone starts with a total annual allowance of 80,000 for 2015-16, plus any available carry forward, in the pre-alignment year. Individuals/pension scheme members will then have an allowance of up to 40,000 (unused from the pre-alignment year) for post- Budget savings (post-alignment year) plus remaining carry forward from 2014-15, 2013-14 or 2012-13. 8

A. If you did use all your possible 80,000 AA in the period 6 April 8 July, you have nothing more to use until after 5 April 2016. B. If you didn t use ANY, you have 40,000 AA to use in the period 8 July 2015 until 5 April 2016 (post-alignment tax year). Any unused (appropriate) annual allowance from the pre-alignment tax year and any unused annual allowance from 2012-13, 2013-14 or 2014-15 can still be used toward the total amount of tax-relievable savings. Here s an example from HMRC: Example 1.2.1. Leonora is a member of an arrangement with a pension input period from 1 June 2014 to 31 May 2015. Under the changes to the pension input period announced on 8 July 2015, the next pension input period will be from 1 June 2015 (the start of the original PIP date) to 8 July 2015 which is the date ALL open PIP s closed and were re-set to start again on 9 July and run until 5/4/2016. Leonora s combined pension savings in these two pension input periods ending in the prealignment tax year (that was those ending on 31 May 2015 and 8 July 2015), will be tested against the pre- alignment annual allowance of 80,000. That is because there were two legitimate pension input periods to make the contribution. Leonora s savings in the pre-alignment tax year are 17,000, which leaves her with 63,000 of unused AA from the pre-alignment year. Her annual allowance for the post-alignment tax year will therefore be the maximum of 40,000 plus any available carry forward, because you can ONLY carry forward unused of a maximum of 40,000 (from the 63,000) Since tax year 2011/12 it's been possible to carry forward unused annual allowance from earlier tax years to the current tax year. 9

Here are the rules for the carry forward unused AA: Unused annual allowance can be carried forward to the current tax year from the previous three tax years: the earliest being 08/09 tax year. It's possible to do this only after the current year's annual allowance has been fully used up Unused annual allowance is used up starting with the earliest year first (3 years). The person had to have been a member of a registered pension scheme at some point during the carry forward year in question. There's no need for any contributions to have been made to the scheme in that year. For tax years 2008/09 to 2013/14 the annual allowance is deemed to be 50,000 and reducing to 40,000 in 2014/15, 15/16, 16/17 and 17/18 (except the pre/post alignment mini-tax years in 2015/16). Where there's unused annual allowance to carry forward from a tax year, it applies to EVERY year; where there is an excess of AA (over that allowable in any year after 2011/12), excess AA is ONLY accounted for from 2011/12 onwards. The rules for valuing defined benefit accrual should always be used in EVERY year using a 16:1 valuation factor (on pension) and with the opening value revalued in line with the relevant CPI (LS are not x16, but added to opening value and then CPI is applied). Whilst, carry forward will continue to apply, there are special rules that apply for tax year 2015-16, as for the purposes of the annual allowance 2015-16 has been split into two mini tax years, the pre-alignment tax year and the post-alignment tax year. The two mini tax years will be treated as one tax year for the purposes of calculating which years unused annual allowance can be carried forward from. For the pre-alignment tax year, carry forward will therefore be available for any unused annual allowance from 2012-13, 2013-14, and 2014-15, as under pre 8 July rules. For the post-alignment tax year, carry forward will be available for any unused annual allowance from these same three tax years, 2012-13, 2013-14, and 2014-15. Where there is unused annual allowance from the pre-alignment mini-tax year (up to a maximum of 40,000, from the pre-alignment tax year), this IS the CF figure to be used in any future CF calculations for the 2015/16 year. Remember, you can only use CF where there is any left from the three previous tax years AND where the current year s AA has also been used up first. 10

Money Purchase Annual Allowance (MPAA) rules As discussed previously, the main point here is that there are now FIVE sets of Annual Allowance rules: one for those accruing benefits and not accessed their pension options and one for those who have accessed flexible pension options. There is then a further split between money purchase and defined benefit accruals and whether you are dealing with pre/post 2015/16 year AND then further complicated by the Tapered Annual Allowance (further topic). For MPAA calculations, there is a sequence of steps which make the whole analysis much easier to follow: Firstly, let s look at how the new MPAA rules and when the new 4,000 MPAA limit is triggered:? Have you triggered the MPAA rules? a) Triggering MPAA rules When a member has used the new pension flexibility rules, the money purchase annual allowance (MPAA) of 4,000 maximum becomes applicable for that individual. The (money purchase) annual allowance for that member drops to 4,000. They'll still have an annual allowance of 40,000 in total, but no more than 4,000 can be for money purchase arrangements, from the date that the MPAA is triggered. The various triggers for the new MPAA, after 5 April 2015: Accessing an uncrystallised funds pension lump sum (UFLPS); Taking Income from a flexi-access drawdown fund (FAD); Using a flexible annuity; Taking income of more than the capped amount from a fund that was in capped drawdown (and hence moving into FAD; Taking a stand-alone lump sum, with primary protection and registered tax-free cash; Taking a scheme pension from an occupational money purchase arrangement with less than 12 members; Converting pre-6 April 2015 capped drawdown fund to a flexi-access drawdown fund, and Immediate conversion of flexible drawdown (pre-april 2015) to flexi-access drawdown on 6 April 2015. The trigger for the MPAA is deemed to occur immediately on first payment. The automatic conversion of a flexible drawdown plan to flexi-access on 6 April 2015, was immediate. 11

Exemptions which do not trigger the MPAA: Tax free cash/pcls only: designating flexi-access drawdown is not a trigger; it s taking something out which triggers the MPAA. Secure income: Taking a secure income, such as a non-flexible annuity or defined benefit pension, won't trigger the allowance cut. Capped drawdown: Existing capped drawdown users on 5 April 2015 won't be caught; as long as their drawdown income remains within the income cap. Designating new funds for drawdown within a capped drawdown plan which is a single arrangement will keep the 40,000 limit - providing, of course, the income remains within the capped drawdown limit. Designating funds for flexi-access drawdown (FAD); it s the taking of income which triggers MPAA, not the designation. Small pots: Small pots taken as lump sums under the triviality or stranded pots rules won't trigger the allowance cut. Dependants' pensions: The payment of dependant's flexi-access drawdown won't trigger the allowance cut. But it will be triggered if the dependant receives an uncrystallised funds pension lump sum (or has already flexi-access drawdown income) from their own pension funds. It is not triggered by dependents flexi-access. 12

Where an individual triggers the money purchase annual allowance rules (as defined above), they will have a 4,000 annual allowance for money purchase pension savings, from the date that they trigger the MPAA.? Is the money purchase contribution made greater than the MPAA limit of 4,000? a) Members subject to the MPAA (that is, where the MPAA has been triggered) and where the 4,000 money purchase annual allowance is not exceeded, then their total annual allowance (AA), including for money purchase and defined benefit arrangements, will continue to be 40,000 plus any unused annual allowance carried forward from the three previous tax years which can be used for mitigation of any DB pension input. Remember, the total MPAA is less than 4,000 in this case. You cannot use CF for the purposes of increasing your money purchase contributions, once the MPAA has been triggered. For these clients it is BAU. They are operating within the limits and do not have any further considerations except to say that they will not be able to utilise any unused CF/CB for any money purchase contributions going forward. This is effectively the default calculation This is the default calculation to be used where the overall default AA of 40,000 is used as a total, but only where the MPAA is less than 4,000 in that period. IMPORTANT NOTE: when the MPAA is triggered the MPAA limit applies from that date going forward. That trigger date is critical. b) Members subject to the MPAA, where the 4,000 MPAA is exceeded will retain an annual allowance for defined benefits pension savings of the standard annual allowance ( 40,000) and any unused allowance carried forward (for DB accruals), but less any contributions made to money purchase arrangements up to a maximum of 4,000. For DB pension savings this means reducing the amount of AA available by 4,000 = the MPAA maximum limit and where all money purchase contributions over 4,000 are excess. This is effectively the alternative method of calculating any excess AA, when the MPAA is triggered and MP contributions have exceeded 4,000. 11

The key formula (the alternative method) when analysing a situation with MPAA excess of 4,000: DB Annual allowance = 40,000 + any CF, less any MPAA (to maximum of 4,000). Which results in a two-part calculation for the alternative method a. DB Annual allowance = 36,000 + any CF b. MPAA = 4,000 less MP contributions (which when using the alternative method will always result in a taxable charge, because it is only used when MP contributions are greater than 4,000) This is known as the alternative annual allowance If ANY money purchase contributions exceed 4,000 for an individual subject to the MPAA, it is then tested. There is NO carry forward (CF) which can be applied to reduce this in any way. Unused annual allowance brought forward from earlier tax years will not be available to increase the MPAA available, nor may any unused MPAA be carried forward. The excess (above 4,000) money purchase AA contributions are subject to the normal annual allowance charge (no changes have been made to 'scheme pays' rules). 12

Here is an example of MPAA: Example 1.2.2. Linda is a member of three pension arrangements 2017/18: 1. money purchase arrangement (uncrystallised) 2. FAD (taking pension income) 3. Defined benefit scheme (accruing member in 2017/18) with PIA of 31,000? Have you triggered the MPAA rules?? Have you tested your MPAA above 40,000 in any tax year? Let s say, her total pension savings into money purchase arrangement are 2,000. As this is less than 4,000, we use the default method and measure the total input against the 40,000 AA entitlement. Her total 2017/18 pension savings are therefore tested against the standard 40,000 annual allowance. No change here for Linda as she kept her MPAA within the 4,000 limit, her total defined benefit pension savings input amount (PIA) is 31,000, making total pension savings for the tax year of 33,000. Thus, no annual allowance charge is due and she has 7,000 unused annual allowance to carry forward to the next year. No change to normal annual allowance rules currently in place. Nice and easy. Then progress to the next year. If she has no other unused allowance to carry forward, she will have an overall annual allowance of 47,000 in 2018/19. However, her money purchase annual allowance remains 4,000, with no uplift for MPAA maximum of 4,000 no CF/CB to enhance any MPAA. 13

? What amount of AA excess is chargeable? The chargeable amount is the higher of: the default chargeable amount which is the excess of defined benefit pension savings plus money purchase pension savings over the annual allowance ( 40,000), and the alternative chargeable amount which is the total of the excess of defined benefit pension savings over the alternative annual allowance ( 36,000) plus the excess of money purchase savings over the money purchase annual allowance ( 4,000): [DB Annual allowance = 40,000 (+ any CF), less any MPAA (to maximum of 4,000)] (This is known as the alternative annual allowance ) Which results in a two-part calculation for the alternative method : a. DB Annual allowance = 36,000 + any CF b. MPAA = 4,000 less MP contributions (which when using the alternative method will always result in a taxable charge, because it is only used when MP contributions are greater than 4,000) Once both calculations are done, then the one which produces the higher amount of taxable excess is used to calculate the tax payable. Back to Linda who is a member of three pension arrangements 2017/18: 1. money purchase arrangement (uncrystallised) 2. FAD (taking pension income) 3. Defined benefit scheme (accruing member in 2017/18) with PIA of 31,000 If Linda contributed 11,000 to her money purchase arrangement, then 7,000 of that money purchase contribution could be subject to an annual allowance charge because she has an MPAA maximum of 4,000; and Assuming she had no carry forward (which could be used for DB pension savings input) with a defined benefit savings PIA (pension input amount) of 31,000, that would not attract an annual allowance charge on as it had not exceeded the 36,000 alternative annual allowance limit. Therefore, Linda could have one AA charge on her savings: an MPAA excess of 7000 ; the tax on that excess 7000 is payable by her. 14

But, the chargeable amount is the higher of: the default chargeable amount which is the excess of Linda's defined benefit pension savings plus money purchase pension savings over the annual allowance ( 40,000), and the alternative chargeable amount which is the total of the excess of Linda s defined benefit pension savings over the alternative annual allowance ( 36,000) plus the excess of money purchase savings over the money purchase annual allowance ( 4,000). That is: The excess [ 31,000 + 11,000] = 42,000 = 2000 (the default chargeable amount) or, 11,000-4,000 = 7,000; plus the excess of 31,000 over 36,000 = nil excess = total of 7000 (the alternative chargeable amount) In this case, the alternative chargeable amount is higher than the default chargeable amount, confirming that 7000 excess is chargeable. Linda will therefore be liable to an annual allowance charge on her chargeable amount of 7000 (see the last topic in this module to work this out). Here s another example what if Linda s PIA looked like this: The excess [ 29,000 + 13,000] = 42,000 = 2000 (the default chargeable amount) or, 13,000-4,000 = 9,000; plus no excess of 29,000 over 36,000 = 0 = Total of 9000 (the alternative chargeable amount) In this case, the alternative chargeable amount is (again) more than the default chargeable amount, confirming that 9000 excess is chargeable. 15

Linda will therefore be liable to an annual allowance charge on her chargeable amount of 9000. As you can see it makes sense to use the alternative method when you are in excess of 4,000 MPAA. The video explanations should be watched when you read this through for the second time. Try this: Linda is a member of a money purchase arrangement and a defined benefit arrangement and has taken income from her flexi-access drawdown fund under her money purchase arrangement in December 2017. She has no available carry forward. Her total defined benefit pension savings for the tax year are 28,000 and her total savings to her money purchase arrangement was a single premium 11,000 on 1 January 2018. What amount of AA is subject to a charge, if any? 7,000 is chargeable, because it is above the 4,000 MPAA limit and a test is triggered. The default amount is 11,000 and 28,000 = 39,000, therefore no charge. Using the alternative method, then 4,000-11,000 = excess 7000 MPAA and under DB input 30,000-28,000 = zero excess; therefore, the highest charge is 7000 and that is applicable. Note how the excess above the MPAA is caught by the alternative method. That is when you use it. Have a look at this example: John, who has adjusted income of 60,000 is a member of a money purchase AVC arrangement and a defined benefit scheme. On 6 April 2017, he triggered the money purchase annual allowance rules by taking an uncrystallised funds pension lump sum. If he contributes 14,000 into his money purchase arrangement during 2017/18, what is the maximum pension input that can be made into the defined benefit scheme without incurring an annual allowance charge (no carry forward available)? 16

The answer is 36,000. The alternative method requires us to calculate the excess over 4,000 MPAA as chargeable, leaving 36,000 for the DB PIA (and no CF in this case). How transitional year (2015/16) MPAA is assessed (when MPAA was 10,000 pa) As we ve discussed, where the trigger event occurs part way through a pension input period, the pension input for that arrangement will be split into the amount that arose up to and including the date of the trigger event and that input afterwards. Only the latter part of the input is tested against the money purchase annual allowance. This is no different in the transitional year. If flexible access has occurred in the prealignment tax year (the mini tax year from 6 April 2015 to 8 July 2015), the money purchase annual allowance for savings made during the pre-alignment tax year is 20,000, and the alternative annual allowance for this period is 60,000. This means the potential total MPAA allowable for anyone subject to MPAA between April 6 2015 and 8 July 2015 could have been a maximum 20,000 (and with the associated alternative annual allowance of 30,000 x 2 = 60,000). This is because it would have been possible to have had to pension input periods ending between 6 April 2015 and 8 July 2015. Therefore, it could have been possible for someone to have used 2 x 10,000 MPAA in that period. It is useful to understand where the 20,000 maximum MPAA came from in the 2015/16 pre-alignment year where the MPAA was triggered early in the 2015/16 tax year. It is now 4000pa in 2017/18 onwards. The money purchase annual allowance for savings made during the post-alignment tax year (9 July 2015 to 5 April 2016) is the amount of the 20,000 that has not been used from the pre-alignment tax year, subject to a maximum of 10,000. So, if you did use all your possible 20,000 MPAA in the period 6 April 8 July, you have nothing more to use until after 5 April 2016. If you didn t use any, you have 10,000 MPAA to use in the period 8 July 2015 until 5 April 2016 (post-alignment tax year). If flexible access occurs in the post-alignment tax year, the money purchase annual allowance for savings made during the post-alignment tax year is 17

10,000 (from the date at which it is triggered) and the alternative annual allowance will be up to 30,000 (plus CF). Any unused (appropriate) annual allowance from the pre-alignment tax year and any unused annual allowance from 2012-13, 2013-14 or 2014-15 can be used to mitigate any DB input. If you used some in the pre-alignment year, then your MPAA in the post-alignment year is [ 20,000 less your pre-alignment MPAA contribution]; with any balance UP TO 10,000 available. Here s a couple of examples from HMRC: Example 1.2.3. Vim flexibly accesses her pension savings on 1 May 2015. This is in the pre-alignment mini tax year between 6 April and 8 July. She is therefore subject to the money purchase annual allowance for the pre-alignment (and post-alignment tax year and subsequent years in 2016/17, 2017/18 and beyond). Her total pension savings for the pre-alignment tax year were 42,000 of which 8,000 were money purchase savings. That means that the MPAA limit of 10,000 was not breached. There was 34,000 of DB pension input. The total maximum amount of AA limit for the prealignment year = 80,000. This is split: 20,000 for MPAA and 60,000 for DB pension input when using the alternative method. Her MPAA amount was less than 10,000, Vim therefore has a money purchase annual allowance of 10,000 for the post-alignment tax year between 9 July and 5 April 2016. This is because, 20,000 less 8,000 (the MPAA PIA) leaves 12,000 unused, but a maximum of 10,000 can be carried into the post-alignment year. Example 1.2.4. Hari flexibly accessed his pension savings on 1 October 2015. He is therefore subject to the money purchase annual allowance for the post-alignment tax year. 18

He has a money purchase annual allowance of 10,000 for the post-alignment tax year from 1 October 2015. He didn t use ANY in the pre-alignment tax year, so in the period 8 July 2015 until 5 April 2016 (post-alignment tax year), the money purchase annual allowance (MPAA) for savings made during the post-alignment tax year is 10,000, from 1 October 2015. Example 1.2.5. In the transitional year 2015/16: Here s the background pre-8 July 2015 for Lesley s contributions: The PIP for money purchase arrangement was aligned to the tax year. Contributions were based on 1000/month starting on 10 May 2015. She accessed FAD on the 1 November 2015. No DB pension savings input Post budget on 8 July 2015: a) PIP was closed on 8 July b) New PIP was opened on 9 July until 5 April 2016 c) Pre-alignment year is 6 April to 8 July 2015 d) Post-alignment year is 9 July to 5 April 2016 Her arrangement which had a PIP aligned to the tax year, has now got two PIPs: 1) Pre-alignment year is 6 April to 8 July 2) Post-alignment year is 9 July to 5 April 2016 In the first PIP, with no MPAA triggered, she makes 2 contributions (2 x 1000 on 10 May and 10 June). This is measured against her normal AA for 2015/16, which in the prealignment year was 80,000. Then in the post-alignment year, she triggers FAD and the MPAA rules on 1 Nov 2015 onwards. So we look at the rules: If you didn t use ANY (as our case), you have 10,000 MPAA to use in the period 8 July 2015 until 5 April 2016 (post-alignment tax year). If flexible access occurs in the post-alignment tax year, the money purchase annual allowance for savings made during the post-alignment tax year is 10,000, from the date it is triggered in this case 1 Nov 2015. For MPAA calculations purposes, we apply all our previous rules to now calculate the amount charged; Measure the MPAA input from November onwards (5 months payments x 1000) and, the whole MPAA input for the PIP (9 months from 10 July to 10 march 2016 x 1000). 19

It s the 5 months in the second period which is accessed against the MPAA for the postalignment year (in this case the starting point is the point at which FAD is triggered = November until March 2016 = 5 x 1000) 5000 is less than 10,000 therefore no MPAA test and ALL pension inputs are measured against the normal annual allowance in the post-alignment year which is effectively the default method. The default chargeable amount: = 40,000 + CF less 9,000 (in total) = 40,000 less 9000 = no excess. Therefore, no charge using the default chargeable amount. There is no double check in this case, because the alternative chargeable amount is only used where the MPAA is greater than 10,000 and where you have DB pension input. Pension Flexibility: Reporting Requirements To ensure that members and scheme administrators know when a member is subject to the MPAA described above, new reporting requirements are introduced (see further within the module for more information on this). When a member first flexibly accesses their pension benefits (as described throughout this module), the scheme administrator must provide the member with a statement confirming the date the first payment occurred and setting out what they (the member) must do. They will be required to do this within 31 days of the flexible access occurring. Members and reporting MPAA The member will have to notify any other schemes that they're an active member of, (contributions are being paid to a money purchase scheme) within 91 days of receiving the statement from the scheme administrator (or 91 days of becoming an active member, whichever is later), so that all providers are aware that the MPAA rules apply to this member (including new schemes, but excluding transfers). When making a transfer, if a transferring scheme has been notified by the member that they have flexibly accessed pension benefits or the member has flexibly accessed their rights in that scheme, the scheme administrator will be required to notify the receiving scheme of the date they believe the first flexible access occurred. 20

Tapered Annual Allowance Further annual allowance changes were announced in 2015, effective from 6 April 2016 (and applies for 2017/18), for individuals with income that exceeds certain income limits in the tax year, will have their annual allowance restricted or tapered down to a maximum of 10,000. This is estimated to effect approximately 300,000 individuals in the UK and net over 1 billion in tax revenue by 2020/21. Those Individuals, are those whose earnings exceeds both a Threshold Income of over 110,000 and an Adjusted Income in excess of 150,000; both these income tests must be satisfied for Tapered Annual Allowance (TAA) to apply in 2017/18: A). Threshold Income? What is Threshold Income (over 110,000)? Threshold Income is basically all gross income (investment as well as earned) less the grossed up amount of any pension contribution subject to relief at source, OR All gross income (investment as well as earned) less gross pension contributions through Net Pay arrangements (effectively, occupational pension schemes). Of course, it can be a bit more complicated when you bring in other deductibles like charity contributions, but we ll keep it straight-forward and pension-orientated to start with. The adjusted income test is set to limit the extent of the new TAA and not penalise those individuals with lower incomes, who may have one-off large ER pension contributions. If the individual's net income is no more than 110,000 they will not normally be subject to the tapered annual allowance. However, interestingly, it will be possible to reduce their 'threshold income' by making a personal contribution to bring their 'threshold income' below 110,000 and thus fail the threshold test and not be subject to TAA (and this could be an excess annual allowance contribution). However, anti-avoidance rules were introduced so that any salary sacrifice set up on or after 9 July 2015, will be included in the threshold definition to ensure that income (not caught by the threshold test) is not replaced by ER pension and avoid the threshold test (we ll show you an example of that later). 21

In simple terms: Threshold Income 1. Start with your net income. 2. Deduct the gross amount of your pension contributions (where tax relief has been given at source = relief at source personal pension contributions). 3. Add any reduction of employment income for pension provision through salary sacrifice arrangements set up after 8 July 2015. B). Adjusted income? What is Adjusted income (over 150,000)? This is effectively threshold income plus all pension contributions, or in other words, total income ignoring pension contribution deductions for either net pay or relief at source AND ADD ER contributions (both money purchase and Defined Benefit). High income individuals will face a cut in the amount of tax-efficient pension savings they can make from 6 April 2017 (2017/18 year). The standard 40,000 annual allowance (AA) will be reduced by 1 for every 2 of 'adjusted income' individuals have over 150,000 in a tax year, until their AA drops to 10,000. Adjusted income of 210,000 would see the AA cut by 30,000 to a new Tapered maximum of 10,000 annual allowance for all defined benefit occupational pension savings and money purchase savings. And note: Both tests need to be triggered in the same tax year for the tapered AA to apply. 22

Here's a useful table (table 1.3.1.) to access each situation: Table 1.3.1. Threshold Income Above 110K = move to Adjusted test Adjusted Income Above 150K = tapered annual allowance reductions on 2:1 basis Included Total gross income from all sources. Included Total gross income from all sources ADD in new salary sacrifice arrangements started after 8 July 2015. ADD all employer pension contributions (see note for DB schemes**) Deduct ALL individual pension contributions (both NET PAY and relief at source) Deductions: Note: NO deductions allowed Interestingly, for virtually the first time, we will have to work out or be given the total pension input amount (PIA) for the defined benefit pension savings, less any contributions paid to the scheme by the individual, to work out the value of the employer DB pension contribution (which is the balance from the total input amount less any contributions made by the member). That should make DB pension contribution calculations for tapered or normal AA purposes even more interesting, because it will still be possible to use carry forward/carry back of any unused AA with tapered annual allowance and again, mitigate any possible excess AA tax charge. The unused AA available to CF/CB from a tax year in which tapering applied will be the balance of the tapered amount not used not the full AA available in that year, irrespective of tapering. In simple terms: 1. Start with your net income. 2. Add back in pension savings made for you by your employer. 23

3. Add back in payments made to your pension scheme that got tax relief but were paid before tax relief was given (because your pension scheme wasn t set up for automatic relief or someone else paid into your pension). Here s a couple of examples of Tapered Annual Allowance: Example 1.3.1. In 2017/18, Jim has 20,000 of unused annual allowance to carry forward. His threshold income for the year will be 138,000 and he has planned to take a 40,000 bonus as pension contribution from his company.? What are the implications and explain the options? a) Threshold income > 110,000 [total gross income with no deductions shown for Jim = 138,000, which is above 110,000, therefore Jim passes the first Threshold test] b) Adjusted income > 150,000 [total gross income + employer contributions = 138,000 plus 40,000 = 178,000, which is above the 150,000 and he has passed both Tapered AA tests] Both threshold tests are triggered, therefore reduced/tapered AA applies: [( 138,000 + 40,000-150,000) = 28,000 / 2) = 14,000] 40,000 less 14,000 (the reducer on AA) = 26,000 = AA in 2017/18 Jim can still benefit from a contribution (without any AA excess charges) by virtue of his unused carry forward allowance of 20,000 and his current AA in 2017/18 of 26,000, giving him a total of 46,000 of AA in 2017/18. If he doesn t use any AA from 2017/18, the unused CF from 2017/18 would be 26,000. 24

Example 1.3.2. Rupert has total income of 142,000 and his employer has agreed to pay 40,000 into his SASS in the 2017/18 tax year. He has no CF/CB unused allowance.? Explain how much AA does he have in 2017/18? a) Threshold income > 110,000 [total gross income with no deductions shown = 142,000, therefore he passes the threshold test] b) Adjusted income > 150,000 [total gross income + employer contributions; 142,000 plus 40,000 = 182,000] Both threshold tests are triggered, therefore reduced/tapered AA applies: His adjusted income for the tax year is 182,000: [(( 142,000 + 40,000-150,000) = 32,000/ 2) = 16,000] 40,000 less 16,000 = 24,000 = AA in 2017/18 Rupert s total annual allowance for 2017/18 is 24,000. Example 1.3.3. Andrew earns 125,000 in tax year 2017/18. He also has other taxable income of 12,000 and he contributes 15,000pa gross to his employers DC occupational scheme which his employer matches on a 1:1 basis.? Explain the consequences to Andrew, both for his pension and the tax implications for him. a) Threshold income 125,000 + 12,000 (add other income) less 15,000 (net pay arrangement) = 122,000; Andrew is above the Threshold test of 110,000. He would need to make more pension contributions to increase the deductions to enable a lower threshold income, lower than 110,000 for the test to fail which he is perfectly able to do. The actual test is done at the end of the tax year NOT mid-way through and this means that there are HUGE planning opportunities. Always think of this test being done on the last day of the tax year that s when the calculation is done. 25

b) Adjusted income > 150,000 [total gross income + employer contributions] 125,000 + 12,000 + 15,000 (this is added as an ER contribution) = 152,000 =total of all income (there is NO deductions) AND ADDED ER pension contributions (which was added on 1:1 basis). Both threshold tests are triggered, therefore reduced/tapered AA applies: His adjusted income for the tax year is 152,000: [( 125,000+ 12,000 + 15,000-150,000) = 2000 / 2) = 1000] 40,000 less 1000 = 39,000 = AA in 2017/18 Let s have a look at one last example: Andy earns 90,000 in tax year 2017/18. He also has other taxable income of 12,000 and he was contributing 15,000pa gross to his employers DC occupational scheme which his employer matches on a 1:1 basis, but he started salary sacrifice on 1 December 2017 directing all pension contributions via his employer. He now earns 110,000 in the tax year after the sacrifice of 15,000 (total pension contributions are now 30,000).? Explain the consequences to Andrew, both for his pension and the tax implications for him. a) Threshold income 90,000 + 12,000 (add other taxable income) PLUS 15,000 (salary sacrifice) = 117,000; Andrew is above the Threshold test of 110,000 because the salary sacrificed 15,000 is added back into the income calculation: his threshold income is NOT 102,000. b) Adjusted income 90,000 + 12,000 = 102,000 total net income + 30,000 added as an ER contribution and is made up of all ER contributions (including the 15,000 as a sacrificed contribution, matched on 1:1 basis). = 132,000 Both threshold tests are not triggered, therefore reduced/tapered AA does not apply here. 26