With everything going on over the past couple of months it has been easy to gloss over the changes announced in the 2020 Budget which impact financial planning.
One of the points of interest from this year’s budget was the changes to the Tapered Annual Allowance (TAA). In summary, the income requirements (threshold and adjusted) have each been raised by £90,000.
The TAA is yet another complication to the vast rules and regulations within the world of pensions. As a policy that is often questioned by the financial planning community, it came as a welcome relief that the government chose to review and amend the legislation.
Medical professionals include those often impacted by the TAA rules. An increase to the thresholds will hopefully provide a financial benefit to many of the healthcare staff who work incredibly hard, particularly during the current pandemic.
However, the changes to the TAA do not solve the problem. Although the limits have increased, many will still be caught and could be worse off. A client with an adjusted income of £312,000 last year would have been entitled to an AA of £10,000. Now they can only attain tax relief on £4,000 which equates to a minute 1.28% of their earnings.
There is also the problem of a ‘cliff edge’ threshold income. A threshold income of £200,000 means an individual could potentially contribute £40,000 into a pension. A threshold income of £200,001 could mean that this is reduced down by as much as £36,000 to £4,000. What a difference a pound makes!
Will this mean that more doctors decide to reduce their hours to avoid the effects of this rather than improving the number of doctors staying in active service?
The increase to the thresholds does not remove the complexity of the legislation either. It is often not possible to calculate a member’s tapered annual allowance until the end of the tax year when they have already paid their contributions, making it extremely hard to plan. This is especially true for NHS pension members due to the complexity of the scheme itself.
As frustrating as this is to individuals, I think that this presents an opportunity for advisers to add value by providing analysis and assessing the best options for their clients. Now may be a good time to contact those clients who are high earners to make sure they are not detrimentally affected by the change in legislation or can now save more than before.
At IPS we are experienced in calculating and analysing the effects of the tapered annual allowance, taking into consideration other taxes at play such as the lifetime allowance tax charge and inheritance tax if money is saved elsewhere instead of a pension.
If you are an IFA and require Paraplanning assistance don’t hesitate to get in touch.