Advisers are warning that HM Revenue & Customs’ pensions annual allowance calculator is producing incorrect results for certain investors as it fails to take account of straddling pension input periods.
In October 2010, the Government set out plans to cut the annual allowance from £255,000 to £50,000 from April 2011.
Policymakers introduced transitional protection for people whose pension input period started before October 14, 2010 and ended in the 2011/12 tax year so that anyone with a PIP beginning before that date who had made big contributions towards a target annual allowance of £255,000 would not be unfairly penalised. This is known as the straddling pension input period.
The transitional provisions apply if the total pension input for 2011/12 exceeds £50,000. It works by treating the straddling period as if it was two separate input periods. This means total contributions in the straddling input period are treated on the basis of a £255,000 annual allowance. Within this overall limit, any contributions made from October 14 onwards are based on the new £50,000 limit.
The Advice Lab director Fraser Grant says HMRC has failed to account for these transitional rules in its own online annual allowance calculator.
He says: “This is serious because there is no disclaimer on the calculator and you would expect HMRC to interpret the legislation correctly. Anyone thinking of using this should be wary because it may well give you the wrong answer.”
Standard Life head of pensions policy John Lawson says between 10,000 and 20,000 people could fall under the straddling rules.
In one example Lawson entered into HMRC’s calculator, he says the available annual allowance for 2012/13 was underestimated by £67,000.
He says: “This is always a risk when you have complicated rules, which is why we decided not to put our calculator in the public domain. You cannot put something out that is not right or people lose trust.”
HMRC was unavailable for comment on the issue.