Last September, HM Revenue and Customs’ (HMRC) Personal Pensions Statistics publication included a new table giving eleven years’ worth of data relating to annual allowance breaches. The findings were very interesting, if not surprising.
Let me give you an example. In 2011/12, when the annual allowance plummeted from £255,000 to £50,000 (see below), the number of people reporting annual allowance breaches increased by more than 5,000%, from only 140 to 7,490. Not a shock, perhaps, but what I found more interesting was that the following year, the number of reports dropped by more than 30% to just over 5,000. The fact that the figure dropped but remained very high suggests to me that the initial increase in 2011/12 was caused by a mix of people who accidentally overpaid (and didn’t make the same mistake twice), and people who intentionally saved more than the new, lower allowance because they still saw it as a worthwhile way to save towards their retirement despite the lack of tax relief.
Source: HMRC Personal Pensions Statistics, September 2018
There is another huge leap in the number of breaches in 2016/17 – the first year of the tapered annual allowance. That year, the number of breaches more than doubled, from just below 9,000 to just below 19,000. Not quite as dramatic as 5,000%, but then we’re talking about much larger numbers to begin with. At this point I was disappointed that the data didn’t yet stretch to 2017/18; I’m very intrigued to see if there’s another drop off in the numbers similar to in 2012/13. It seems logical that this increase will also be caused by a mix of people intentionally and accidentally breaching, but at this point there are no figures to support this thought.
What we can see from the numbers is that the average excess value among those paying via their tax return increased from 2015/16 to 2016/17. If the majority of the 10,000 additional breaches were from people who were trying to stick to their tapered allowance but whose calculations were slightly out, you might expect the average excess value to drop. The increase seems to be indicative of errors (individuals still thinking their allowance was £40,000) and intentional overpayments by those really treating the allowance as an allowance, and not as a limit.
Of course, all of this is more or less guess work. HMRC does not distinguish between annual allowance, money purchase annual allowance (MPAA) and tapered annual allowance breaches. Without that, it’s impossible to rule out entirely different causes for the reported figures.
Perhaps no one exceeded the tapered annual allowance in 2016/17 at all. Perhaps there were 10,000 people who hated the MPAA so much when it was introduced in 2015/16 that they ignored it entirely in the second year and contributed to their hearts’ content. Alright, that was facetious, but how about a more plausible theory: a combination of the MPAA and the transitional rules from 2015/16 caused confusion over the carry forward calculations, and a lot of the increase in 2016/17 was caused by people who got it wrong.
Speaking of 2015/16 and its array of annual allowance challenges, it may surprise you that the number of reported breaches dropped that year. Did the double allowance in the first part of the year spare people who would normally breach the annual allowance? Were there people in flexible drawdown who had been saving with a £0 annual allowance who regained their annual allowance (albeit with the MPAA) that year? Or were the rules just so confusing that people had no idea they’d breached their allowance that year and therefore simply didn’t report it?
It’s great that this information has been made available, and it’s always interesting to debate such data. But wouldn’t it be even better if there was enough information for us to be able to really understand the effects of specific rules on consumers’ behaviour? Perhaps we’ll never gain a complete picture; there will always be a group of people who don’t report breaches because they aren’t aware of them, and it’s impossible to know the size of that group for certain. However, gaining a better understanding of how people are affected by rules such as the tapered annual allowance and MPAA could help inform future rule changes, and help the government and industry to plan how to improve support for savers.