David Peckham gets under the skin of scheme pays

He walked down the street and stopped outside the office door, checked on his mobile to make sure it was the right building and rang the doorbell. There was a frisson of déjà vu as he waited for a response.

David Peckham was back. He had taken a few years away from being a financial adviser and gone back to education, and as part of that had spent some time travelling and looking at the pension and retirement regimes in a number of other countries. (That was his story – another version suggested that he had to make himself scarce for a while!)

He was making a comeback as a financial adviser again – taking it slowly for a while and working under the gaze and guidance of one of the other senior partners. He had been on a few courses to refresh his knowledge and to make sure he was up-to-date. However, he also anticipated fully utilising his very experienced paraplanner.

Having not been at the coalface for a while he had had to catch up quickly – the one concept that he really struggled to understand was the tapered annual allowance but after a while he thought he had it. When preparing for this client meeting he went through the summary report prepared by Vicky, the paraplanner.

After a while he sat back and called in Vicky. She came in with her coffee and sat opposite David.

He paused for a minute, “Well I think I’ve learnt a lot from your report - the income calculation can be quite complicated and I like your recommendation that we should ask the accountants of more complicated clients for a schedule of income/reliefs and the dates that the income is owed. We can then work out any taper and any Annual Allowance tax charge if pension contributions exceed the allowance.

“One bit where I’m a tad confused - can you explain ‘scheme pays’ to me?”

Vicky smiled, “If a client exceeds the Annual Allowance (AA) due to a ‘taper’, and a tax charge becomes due, they can ask their pension scheme to pay the charge. If it is a DB scheme it can be taken from the final benefits. The scheme will need to calculate the reduction in benefits on a reasonable basis. If the scheme is a DC arrangement it is much easier. The fund can be reduced by the amount of the tax charge.”

David nodded and Vicky continued, “Just to confuse matters we have ‘compulsory’ scheme pays and ‘voluntary’ scheme pays. For compulsory, the scheme is only obliged to make the payment if two specific conditions apply. Firstly, the AA tax charge for all pension schemes in that tax year exceeds £2,000. Secondly, the pension input amount to the scheme the charge is coming from also exceeds £40,000 for the same tax year.

“If these conditions are met and scheme pays is being used, the individual and the scheme will become jointly and severally liable for the AA tax charge.”

David interjected, “But what if the individual's AA is reduced because of tapering?”

Vicky continued, “It is still the figure of £40,000.”

David asked, “What is the deadline for applying for scheme pays?”

Vicky responded, “If, say, an individual has an AA tax charge for 2016/17 (the first tax year in which the tapered allowance applied) and the two conditions are met, it will need to be included in Self Assessment for the January 2018 deadline, and the request needs to be with the scheme before 31 July 2018. There are extra conditions if the client will reach age 75 or take all their benefits.”

David continued, “OK I think I’ve got that – what’s the other option?”

Vicky explained, “If those conditions do not apply, the pension scheme is not obliged to offer scheme pays. The individual could pay the tax charge through Self Assessment or if they are able to then use voluntary scheme pays. With voluntary scheme pays the individual informs HMRC via Self Assessment. They enter the total pension input amount and fill in the ‘Pensions savings tax charges’ section (additional pages (SA101) in the paper return) entering the excess figure and calculating the amount of charge.

“The key difference is that this is a voluntary offering by the pension company and we will have to check for the client that the scheme in question allows such a facility. The client will also have to send the pension company a copy of their tax return, evidence of contributions to other schemes and probably complete an application form and pay a charge.”

Vicky stopped and David immediately responded, “How do you know all that?”

Vicky smiled, “It’s my job to know.”

David nodded, “And it is my job to see the big picture – this is a nightmare – I cannot see many of our clients qualifying for compulsory scheme pays, so I think our role will be to explain the voluntary option so that any tax can be paid directly from their DC plan.

“But my bigger problem is more practical – a lot of people will never have done Self Assessment forms, will not meet the deadline and many will not even know anything about how this tax charge arose. Although, another thought crosses my mind – could we offer this as a standalone service to our clients? Perhaps we could even assist some local accountants who do tax returns by offering some expert pension input?”

Vicky looked a bit quizzical!

David quickly added, “Sorry Vicky perhaps I should have said some of ‘your’ expert pension input.”

Back to today and the client opened the door for David’s first client meeting in over three years. He was back in the game and was looking forward to adding some value to a case that the client had virtually no chance of understanding on their own.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.