Early planning is needed around pensions at the end of an unusual tax year, says Jessica List, pension technical manager, Curtis Banks
It seems very early to start talking about the end of the tax year: April seems a very long way off as I sit here writing on a particularly dismal January day. However, we all know January and February’s trick of seeming to go by in a flash, and as the lead up to this tax year end will be shortened by the new tax year starting immediately after the Easter weekend, perhaps it isn’t so early after all. There’s also a greater chance than normal that clients’ plans have been disrupted in some way, so there may be more tax year end considerations than normal. Here are just a few pension elements to consider with your clients over the next few weeks.
Pensions contributions
It will come as no surprise that the main area is contributions. A huge number of people experienced furlough or redundancy this year, a consequence of which is that their pension contributions probably haven’t gone to plan. Many of those who are self-employed may also not have made planned contributions earlier in the year if their businesses were affected by the measures. As we near the end of the tax year it will be important for clients to check, if they haven’t done so already, exactly what has happened with their contributions this year. If their circumstances now allow, they may also need to consider whether they wish to make up any shortfall before the end of the year. There will also be those whose situations and finances are still being disrupted by the measures, who may need to consider the effect on their future planning.
There will also be clients who are fortunate enough to have kept their jobs through the pandemic and may also have found their outgoings were considerably lower than normal due to the restrictions. Some may already have thought to contribute more from their excess funds, but if not, it is certainly worth considering before the end of the tax year. Such clients may also be in a position to consider using up any carry forward allowance they have available; at least from the 2017/18 tax year, which will no longer be available from 6 April 2021.
Annual allowance
One thing to watch out for, however, will be clients who have inadvertently triggered the money purchase annual allowance (MPAA) during the tax year. Some individuals will have triggered the MPAA by accessing part of their pension to see them through a difficult period, not appreciating at the time that their plans for rebuilding their savings could be affected. It’s worth remembering that for clients in this position, not all of their money purchase contributions for the year will necessarily be tested against the MPAA this year. When it is triggered, the MPAA applies from the following day. Therefore any contributions made during the tax year but before the MPAA trigger will only be tested against the normal annual allowance; only those made after the trigger event will also be tested against the MPAA.
The approaching end of the tax year also means that clients affected by the tapered annual allowance will be in a better position to estimate their allowances for the year, should they wish to try to maximise their tax relievable contributions before the end of the tax year (rather than looking to use up any remaining allowance at a later date using carry forward). The silver lining to this painful process is that fewer clients will be affected this year due to the £90,000 increases to the threshold and adjusted incomes. However, don’t forget that the minimum allowance is now just £4,000, rather than £10,000.
Budget threat
We know that the next Budget will take place on 3 March. While we don’t know what it will hold, people often choose to finalise their arrangements ahead of a Budget, in case of any detrimental changes that take immediate effect. While this hasn’t happened often with pension rules, there are still those who will see this as a more important deadline than the end of the tax year. It’s certainly true that there are rumours about pension changes, with contribution tax relief still firmly planted at the top of the list. While a full overhaul of the tax relief system would most likely require a considerable lead-in time, other changes such as lowering the annual allowance could easily be implemented much more quickly. However, it’s still more likely that such changes would take effect from the new tax year rather than immediately.
The Budget could also confirm the standard lifetime allowance figure for 2021/22, with whatever degree of rounding is applied this year. The increase will mean that another round of people with individual protection 2016 will revert to the standard lifetime allowance, as it will be higher than their protected amount. There’s nothing clients or advisers need to do to make this happen; however, some people may wish to check their new remaining lifetime allowance and PCLS entitlement figures once the new lifetime allowance is confirmed.
Here’s hoping that an easier 2021/22 awaits us on the far side of this tax year end planning.
This article was first published in the February 2021 issue of Professional Paraplanner.
