20th July 2018

Prudential: Can’t pay? We’ll take your pension away!

Your client has an annual allowance excess which means they’ve a tax charge to pay. You’ve heard a pension scheme will pay this charge from a members benefits using ‘Scheme Pays’. 

If you client is in the fortunate position that they could afford to pay the tax charge on their own, should they pass up an offer for Scheme Pays and pay their own way? Jacqueline Clezy, Technical Manager at Prudential works it out.

Case study

Jason, based in Manchester, is a member of a defined benefit pension scheme which has an accrual rate of 1/60^thfor each year of service. His pensionable pay in tax year 2017/18 was £198,000 which means he gained (198,000/60) £3,300 pa pension entitlement, we’ll assume he’d no pay rise or the gain would be higher.

To make the annual allowance sums simpler let’s assume CPI was nil, and this equates to a pension input amount of (3,300 x 16) £52,800. We’ve worked out Jason’s adjusted income and find that he is subject to a tapered annual allowance of £10,000, meaning an AA excess of £42,800. Adding this amount to Jason’s other taxable income means the tax rate for his charge is 45%, i.e £19,260.

Jason’s scheme administrator has sent him a Pension Savings Statement (PSS) as his inputs have exceeded the annual allowance. Remember the scheme won’t necessarily have enough information to know if any member actually has an AA excess, as they won’t have information for any other schemes their members may be contributing to. In any event, they’re only responsible for tracking member’s standard or money purchase annual allowance in their scheme. Everything else, e.g. tracking available carry forward of unused AA, is up to each individual. The scheme information received by Jason confirms the factor for giving up pension to pay an AA charge will be 20:1.

Read full article here. 

Pensions