Coping with the MPAA mess

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. A sizeable portion of the pension industry were disappointed that this was the only u-turn we saw, as the decision was announced to plough ahead with the reduction of the money purchase annual allowance (MPAA) from £10,000 to £4,000.

The consultation response that followed a couple of weeks after the Budget made it clear that I was not alone in being critical of this reduction, and the widespread (though not unanimous), industry opinion was that it was a bit harsh, especially on those that made the decision only recently to flexibly access pension benefits based on an allowance of £10,000. 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 – for example, unemployment, divorce or bankruptcy, 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 that their MPAA is £10,000 and there are no requirements for providers to tell them that this is now being cut to £4,000. Information we have received from HMRC suggestions that this won’t 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 which still state providers must tell anyone flexibly accessing benefits that they will be restricted to contributions of £10,000 a year.

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 of course 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 don’t 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’s important to look at the scheme pays options. In most cases “scheme pays” itself won’t 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.

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. However, as the name suggests, it is voluntary and not all providers will offer it.

Whilst 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 that 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 don’t then the member must pay the tax due by 31 Jan 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 don’t 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 client’s have it in the first place!

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.