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The Annual Allowance - big savers beware!

Byline: Georgina Rankin

The cap on the amount of savings a person could build up in registered pension schemes over a year - the Annual Allowance - was reduced from pounds 255,000 to pounds 50,000 from April 6, 2011. To the extent that this cap is exceeded a tax charge may be levied.

What immediate issues will individuals with high pension savings have to address for the tax year 2011/2012? Given that it is the individual's responsibility to determine whether an Annual Allowance tax charge has been incurred, there will be a need to assess the increase in savings over the pension input period in each pension scheme of which the individual is a member. A pension input period is usually a one-year year period, although the start and end date of each pension input period will vary between pension schemes. Pension scheme members should already be aware of their applicable pension input periods.

The assessment of whether a member has exceeded the Annual Allowance is relatively straightforward in defined contribution pension schemes, as the calculation of savings accrued over a pension input period will depend on the total amount of employer and employee contributions paid to the scheme. The calculation is less straightforward for defined benefit pension schemes. There is a prescribed formula for assessing the value of the pension that a member has accrued throughout the year in a defined benefit pension scheme, taking into account factors such as any increase in salary.

What information should members expect to receive to allow them to determine whether a tax charge is due? Members may receive (and can request) a pension savings statement from the pension scheme, advising on the increase in their savings over the pension input period. The pension savings statement should also state the level of the Annual Allowance for the relevant tax year, and the same information for the last three tax years to help a member identify if he has any 'carry forward' entitlement. This is because it is possible for members to carry forward unused Annual Allowance from the past three years.

Pension schemes are obliged to provide a pension savings statement to a member automatically by October 6 following the end of the relevant tax year if the member exceeds the Annual Allowance in that pension scheme. For the tax year 2011/12 the pension scheme has an extra year to issue the pension savings statement - it must do so by October 6, 2013.

Individuals have to account via their self assessment tax return for any Annual Allowance tax charge that is due. A member will be asked to provide information about his pension savings in the tax return. Problems arise with timings for the tax year 2011/2012. The deadline for a member to submit a self assessment tax return for 2011/2012 is 31 January 2013 (assuming that the return is being submitted online). However, a pension scheme will have until October 6, 2013, to provide the member with a pension savings statement - over eight months after the tax return deadline.

If a member does not have the required information from the pension scheme then HMRC expects the member to estimate the amount of his pension savings. This is not a straightforward exercise, particularly where the member is accruing benefits in a defined benefit pension scheme. There are a number of additional complexities (not covered in this article) that may need to be taken into account, depending on the member's circumstances, that will impact upon how the member's pension savings are assessed against the Annual Allowance. Individuals may have to ask pension scheme trustees or administrators to assist them in making their assessment, or take steps to calculate the pension savings information themselves.

Scheme pays If the member incurs an Annual Allowance tax charge of more than pounds 2,000, and his pension savings in any one pension scheme exceeds the Annual Allowance, the member can notify the pension scheme that the element of the charge attributable to savings in that pension scheme should be met from the benefits under that pension scheme - this process is known as 'scheme pays'. For the tax year 2011/12 the member has until December 31, 2013 to issue a notice that he wishes to use 'scheme pays'. Due to the extended deadline for issuing pension savings statements the member could potentially only have from October 6, 2013, until December 2013 to make the decision on whether to opt for scheme pays. This is an important decision for an individual to make as it will impact upon the benefits that will eventually be paid from the scheme and it may need to be made within a tight timescale.

If the Annual Allowance tax charge payable by the member via scheme pays is incorrect, there is an opportunity to correct this mistake by giving an amended notice to the pension scheme at a later date. If the tax liability has reduced it will be for the pension scheme to make a claim to HMRC for the refund, and that refund will be passed on to the member in a form decided by the pension scheme.

Be prepared!

Individuals who have high pension savings would be wise to start understanding the implications of the reduction in the Annual Allowance now. With regards to the tax year 2011/2012 affected pension scheme members may wish to request the necessary pension savings information in advance of completing their self assessment tax returns. This will hopefully ensure accuracy of any Annual Allowance tax charge and allow sufficient time for individuals to assess whether scheme pays is the best option for them.

? Georgina Rankin was promoted to the partnership at Squire Sanders in Birmingham in May 2012. Georgina's practice focuses on advising on occupational pension plans, and she has particular experience in advising both the trustees and the corporate sponsor of occupational pension plans.

Squire Sanders' market-leading Pensions Practice Group is one of the largest and most experienced pensions teams, with 18 partners and over 60 pensions law specialists in the UK, further supported by pension and benefit specialists in the US, Europe and Australia. The team, which has recently been awarded "Pensions Law Firm 2012" in the Pension and Investment Provider Awards run by the Financial Times group, continues to attract a diverse and prestigious client base: alongside advising many household names in the private sector, and an increasing number of public sector bodies, the pensions practice also has particular strengths in utility companies ranging from water to nuclear energy.


Georgina Rankin, Pension Partner at Squire Sanders Understanding the implications of the reduction in Annual Allowance is key for people with high pension savings
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Title Annotation:Features
Publication:The Birmingham Post (England)
Date:Jun 14, 2012
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