The annual allowance is a complex part of pensions advice but, explains Clare Moffat, a client's pension savings statement (PSS) can be the key to successful forward planning
Many advisers will be breathing a sigh of relief now the tax year-end has passed. After all, a large part of an adviser's role in the run-up to 5 April each year can involve working out what, if any, additional pension contributions their clients can make.
This often complex and time-consuming calculation can be made much easier by requesting the correct information earlier in the tax year and a client's pension savings statement (PSS) can be the key to successful forward planning.
A PSS is the document that must be provided by a pension scheme to its members when their pension input amounts in that scheme exceed the annual allowance. A scheme will only need to provide a PSS to a member for the 2016/17 tax year if the member's pension input amounts exceed £40,000 for that period.
Legislatively, all PSSs have to be sent to members of pension schemes by 6 October following the end of the tax year. If the member has more than one pot under the same scheme, the statement must cover all of their pension pots in that scheme.
This does not mean one PSS will be sent by one provider, however, as providers often operate many different schemes. This can often confuse clients when they have multiple schemes with the same provider.
The standard PSS for 2016/17 must contain the total amount of the member's pension inputs made to the scheme for that tax year; the total amount of the member's pension inputs made to the scheme for each of the pension input periods ending in the previous three tax years (for 2015/16 this will be shown separately for the pre and post-alignment periods) and the amount of the annual allowance for the previous three tax years.
In addition, if the member has flexibly accessed their pension savings, the scheme must provide a money purchase pension savings statement if the inputs exceed the money purchase annual allowance (MPAA). The same deadline of 6 October applies.
How can the PSS help with planning?
Annual allowance calculations are complex and often time-consuming. Normally, however, it is not the carry-forward calculations that are the tricky part but, rather, establishing the correct pension input periods, pension input amounts and the correct tax year these relate to. This becomes even more difficult if a client has both money purchase and defined benefits (DB) schemes.
A PSS provides the pension input amount for the relevant tax years in each scheme. This is much more efficient than trawling through money purchase contribution histories or trying manually to calculate the pension input amount for a DB scheme. This was made even more complicated in 2015/16 by the need to calculate the pre and post-alignment pension input amounts.
If a client will not automatically receive a PSS but is likely to need end-of-tax-year pension contribution planning, or may have an annual allowance excess in the 2016/17 tax year, then it would be prudent for advisers to start contacting these clients now to ask them to request a PSS. This will ensure the input amounts are available in good time to establish what unused annual allowance they have available or if they need to report and pay an excess charge.
The scheme must provide the statement within three months of receiving the request although there are circumstances when the scheme requires information from another person, such as the employer, in which case the scheme will have three months from receipt of the information to send the statement to the member.
Once all the PSSs are received, then an annual allowance calculator will help work out if a client can make any more contributions. HMRC and most providers offer such calculators.
Annual allowance excess and use of carry forward
If the PSS, or various PSSs from different schemes, identify that your client has exceeded the annual allowance, then they may have carry forward from the previous three tax years that can be used to deal with the excess.
If, however, your client had excesses in any of the previous three years you will need the input amounts for the three tax years prior to the tax year in which the excess occurred to determine what unused annual allowance will be available for the 2017/18 tax year.
The amount of charge depends on your client's taxable income or reduced net income in HMRC terms. The amount of the annual allowance excess is treated like any other income and is added to the top part of the taxable income. Clients will have to self-assess if any charge is applicable.
Where certain conditions are met, then the client can give notice to their scheme administrator that they want them to pay some or all of their annual allowance charge from their pension benefits. The member can require the scheme to pay some or all of their charge where their total annual allowance charge is above £2,000 and they have inputs in excess of £40,000.
There is no requirement on a scheme to pay the charge if a client has exceeded the tapered annual allowance or MPAA, unless the above conditions also apply.
The annual allowance is a complex part of pension planning. By considering clients' PSSs earlier, however, or requesting a PSS where it is not an automatic requirement to provide one, advisers can be a step ahead and work out what the annual allowance is available to use before the end of the tax year. This is especially important if a client might be affected by the tapered annual allowance.
Clare Moffat is senior technical manager at Prudential
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