Be prepared – it could be a big year for Annual Allowance charges!
We are expecting to see significant Annual Allowance charges for 2017/18 for several reasons:
- The rate of growth of existing benefits is quite high in 2017/18 at 4.5%.
- In contrast to the above, when judging the growth for Annual Allowance purposes the rate by which we are permitted to increase the starting position is only 1%. The difference between the actual growth and the permitted revaluation has the effect of increasing the exposure to a charge.
- Many people have now moved across to the 2015 pension scheme. That scheme has a higher accrual rate compared to earlier versions. Even without considering the growth in previous years’ benefits, if you have pensionable income above £135,000 in 2017/18 in the 2015 scheme, your growth in benefits will be above the standard Annual Allowance of £40,000.
- Many pension scheme members will have had their 2016/17 exposure to the Annual Allowance reduced by the ability to bring forward unused allowances from earlier years. As the unused allowances were used in 2016/17, most of our clients will have to rely on the availability of 2017/18 allowances alone.
- Some higher earning clients will be affected by the Tapered Annual Allowance perhaps due to PCSE’s failure to collect 2016/17 shortfall payments in March 2018. If those payments had been made, they are deducted from income when judging the level to determine if the tapering applies. There will be cases where the failure to collect the shortfall means threshold income is now above £110,000 and therefore the taxpayer potentially becomes subject to an allowance of less than £40,000.
Whilst the above means we will almost certainly see higher charges for 2017/18, one prospect is being considered that may assist.
Presently, the NHS Pension Scheme can pay the Annual Allowance charges under a scheme pays election only to the extent that the pension growth exceeds the standard allowance of £40,000.
Where the taper applies, and your allowance reduces to below that figure, you will have further tax to pay through your tax return, which could mean a significant amount in January 2019.
The NHS Pensions Agency is currently considering whether they ought to accept requests for the scheme to pay amounts that fall above the reduced allowance rather than only the amount that arises above the standard allowance.
Any amount that is paid by the NHS Pensions Agency will have a knock-on effect to reduce the amount of final pension benefits, so advice needs to be taken before making a scheme pays election decision either under the current rules or if they are amended in future.
We don’t know when an answer is expected, but keep your fingers crossed!