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Lisa Webster: Coping with the MPAA mess

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Chancellor Philip Hammond’s one and only Spring Budget will be most remembered for the aftermath that resulted in his U-turn on National Insurance contributions.

Much of the pensions industry was disappointed this was the only U-turn we saw considering the decision announced to plough on with the reduction of the money purchase annual allowance from £10,000 to £4,000.

The consultation response that followed a couple of weeks later made it clear I was not alone in being critical of this reduction. The widespread industry opinion was that it was a bit harsh, especially on those who only recently made the decision to flexibly access pension benefits based on an allowance of £10,000.

But the response paper very much read as though the decision had been made and “we’re going to do it regardless of what you say”.

Arguments had been raised about the fairness for those who may find the need to access funds at a relatively young age due to certain circumstances – unemployment, divorce or bankruptcy, for example – who are then unable to replace savings when things are on the up.

The other issue we have is that anyone who has already flexibly accessed their benefits will have been told their MPAA is £10,000 and there are no requirements for providers to tell them this is now being cut to £4,000. Information we have received from HM Revenue & Customs suggests this will not be introduced either.

Indeed, although the primary legislation to make the change to £4,000 is in Finance Bill 2017, there has been no update as yet to the secondary regulations that still state providers must tell anyone flexibly accessing benefits they will be restricted to contributions of £10,000 a year.

Involuntary violations

So, where does that leave us? Quite possibly with a number of clients who may inadvertently exceed the MPAA.

On top of this, we have the horrendously complex tapered annual allowance, so expect to see a large increase in clients being hit with an annual allowance charge of one form or another. And do not forget, not knowing your annual allowance is no grounds for a contribution refund. All good news for the Treasury.

If the worst happens and your client is hit with an unexpected annual allowance charge, then it is important to look at the scheme pays options. In most cases “scheme pays” itself will not be much help – you can only use this when the annual allowance is exceeded (i.e. £40,000) and you have to have exceeded it in the scheme that is doing the paying.

“The response paper very much read as though the decision had been made and “we’re going to do it regardless of what you say.”

Much more relevant will be voluntary scheme pays. This can be used to pay any type of annual allowance charge and contributions into the scheme paying do not have to be in excess of any minimum. So, you could have employer contributions going to an occupational scheme that exceed the MPAA but use the member’s Sipp to pay the charge. That said, as the name suggests, it is voluntary and not all providers will offer it.

While scheme pays has strict deadlines that must be adhered to and the scheme administrator takes on joint liability for payment of the charge, these restrictions do not apply to the voluntary option.

The member remains solely liable for the charge, so in practice, although there are no specified deadlines in regulation, the member needs to have confirmation the scheme will pay it at the point they submit their self assessment tax return, so they can enter this information on the form. If they do not, then the member must pay the tax due by 31 January in the tax year following that in which the charge arose.

In terms of practicalities, the scheme paying the charge will need to see the completed self assessment with the details of the charge and, where contributions have been made to other schemes, contribution statements.

One final point: even when the annual allowance charge arises do not forget to claim any higher and additional rate relief in the usual way. The annual allowance charge simply cancels out the excess tax relief, so make sure your clients have it in the first place.

Lisa Webster is technical resources consultant at AJ Bell

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