Suffolk Life has seen a spike of enquiries from advisers about its ‘scheme pays’ facility, suggesting more clients may have breached the annual allowance last year, following the government’s “very complicated” transitional rules.
The self-invested personal pension (SIPP) provider said its adviser support team saw “unusually high numbers” of enquiries about freeing up money from clients’ pension plans for tax settlements in the months since the tax year-end, leading it to suggest advisers have struggled to stay on top of the latest changes to the rules. It said normally those types of enquiries are “very few and far between”.
The government made a number of changes to pension taxation following its 2014-15 pension freedom reforms, which allowed all defined contribution savers to freely access their pots from the age of 55.
It effectively reduced the annual allowance from £50,000 to £40,000 in April last year but put in place transition rules prior to the change, which Suffolk Life said could have confused advisers and investors.
The rules saw the April 2015 to April 2016 tax year split into two periods with different tax-free allowances: the ‘pre-alignment tax year’ – April 2015 to July 2015 – for which the annual allowance was £80,000 and the ‘year’ from July to the following April, for which the allowance was effectively nil.
The periods also saw different money purchase rates. The annual allowance dropped to £10,000 for all defined contribution schemes people remove money from in the post-alignment year, before which it was £20,000.
The rules also introduced a taper mechanism for high earners, which sees the annual allowance drop by £1 for every £2 of a person’s adjusted income over £150,000 (income added to pension contributions).
“The fact that more advisers are asking about ‘scheme pays’ suggests more investors breached the annual allowance last year, possibly as a result of the very complicated transitional rules,” said Suffolk Life pensions analyst Jessica List.
‘Scheme pays’ allows investors to settle annual allowance charges from their pension fund, rather than through their self-assessment tax return. Scheme administrators are only obliged to pay the charge from the pension if the investor’s annual allowance charge is more than £2,000 and the investor’s pension input amount for the scheme exceeded the annual allowance.
However, some administrators, including Suffolk Life, will still agree to pay an annual allowance charge if the conditions are not met, List said.
AJ Bell head of platform technical Mike Morrison explained queries regarding overpaid contributions fall into two categories – requests for contribution refunds if these meet HMRC’s requirements, and requests for use of ‘scheme pays’ where a refund is not permitted and the annual allowance has been exceeded.
He said: “We have suggested to HMRC that it should consider amending the ‘genuine error’ rules to allow contributions to be refunded in cases where the annual allowance has been exceeded as a result of a mistake.
“In my view, this will only get worse as at the end of this tax year we will have the introduction of the tapered annual allowance, which is even more confusing and by its operation will result in the annual allowance being exceeded.”
But Mattioli Woods sales and marketing director Murray Smith said: “I wouldn’t say we have seen such issues but this may be because we advise the majority of our clients directly and therefore would be sense-checking annual allowances.
“That said I do sympathise with advisers, particularly those in smaller firms, in terms of maintaining an understanding of an ever-changing playing field in the whole wealth management area – not just pensions.”
Dobson and Hodge financial services director Paul Stocks said he did not find the system confusing but saw how people could be caught out by auto-enrolment or increases in their defined benefit entitlement.
“If someone has the type of protection relying on no more contributions but is then auto-enrolled, they could have a problem. Also, with defined benefits, this would impact on annual allowance. A pay rise for someone with high service could breach the annual allowance,” he said.
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