The November pension schemes newsletter from HM Revenue & Customs (HMRC) has already created a few headlines with its claim that scheme members are “forgetting” to declare the annual allowance charge.
The use of the word “forgetting” is interesting.
Does HMRC really believe it is as simple as this? For people who have not declared charges in previous years because they “forgot”, will HMRC give them the benefit of the doubt and not impose late payment charges?
Of course “forgetting” to do something suggests you know you have to do it in the first place.
The newsletter puts in a request for scheme administrators to remind those members who have exceeded their annual allowance for 2018/19 to declare it – if they don’t have sufficient carry forward.
The rules already state that scheme administrators must send a pensions savings statement to members that have exceeded the £40,000 annual allowance, and to those that have contributed more than £4,000 where the provider knows the money purchase annual allowance (MPAA) has been triggered, so this request is to reach out to other members.
So who are these other members that won’t have received a statement but could still have breached their annual allowance?
The big three
There are three main categories these people will fall into:
- Those who have contributed more than £40,000 across more than one scheme without breaching the £40,000 limit in either one.
- Those who have triggered the MPAA in one scheme but not told another and then put in more than £4,000.
- Those who are hit by the taper, so may exceed their individual tapered allowance, without putting in more than £40,000.
On the flip side, someone who contributes £50,000 (for example) will get a statement, but may not have any charge to pay due to carry forward being available.
It’s fair to say it’s a system that is far from perfect.
Scheme administrators have to report to HMRC those members that have had pension savings statements – be it for exceeding the standard allowance or the money purchase allowance. This gives HMRC an indication of who might be liable for a charge, but it’s not simply a matching-up exercise as carry forward is not considered.
The tapered annual allowance is by far the biggest cause of people becoming liable to the annual allowance charge. This is clearly evidenced when we look at the figures. Prior to its introduction in 2016/17 the highest number of individuals reporting excess contributions in a single year was 7,280* in 2014/15. There was a slight dip in 2015/16 attributable to the “bonus” allowance we had when pension input periods were aligned to tax years.
In the first year of the taper (2016/17) this figure jumped to 18,500, and went up again in 2017/18 to 26,550 with a total of £812m excess contributions being made.
On the surface HMRC asking scheme administrators to remind those members affected seems sensible, but – here is the key issue – there is simply no way the scheme administrator can identify which members those are.
The complexities of the taper mean that even occupational schemes where the scheme administrator may have access to individual’s earnings information, still won’t know what other investment income they have, and therefore will not know if their annual allowance would be tapered, or to what extent. For personal pensions away from the workplace then the administrator has even less chance.
As a provider, we regularly hear from advisers who have new clients come to them and they identify a liability to annual allowance charges. This is often for 2016/17 as well as 2017/18, so has already been missed on two self-assessments. The most common reason is not that the member “forgot” to add it to their return, but simply that they knew nothing about it.
The NHS pension scheme has had all the headlines when it has come to the tapered annual allowance, but it is a problem that goes far wider than senior clinicians. Many other schemes have senior employees with tapering issues and the members are simply not being told they are liable to charges and how to declare them.
Of course, the simple solution is to acknowledge the complex mess that is the tapered annual allowance and abolish it altogether, rather than yet more workarounds. Even if this was balanced with a lower annual allowance for all to keep the books balanced, this could be a more palatable option then the current complexities.
In the meantime, it will be good practice for all schemes to communicate with members explaining the rules, who might be caught, how to check and how to report any charge.
I’m sure many of us dream of the tapered annual allowance being a distant memory that is easily forgotten.
Lisa Webster is senior technical consultant at AJ Bell
*All figures on individuals reporting via self assessment taken from https://www.gov.uk/government/statistics/personal-pensions-pensions-annual-allowance-statistics