Carry forward under defined benefit schemes remains available, handy for members of public sector pension schemes, but this does not offer much comfort to the vast majority who have accessed the pensions freedoms for whom access to public sector pensions is, at best, a thing of the past.
Briefly, because it is an option which is available to such a small proportion of savers for whom the MPAA is likely to be relevant, active members of defined benefit pensions can still make use of carry forward through the alternative annual allowance, which is the maximum amount of defined benefit savings which can be accrued once the MPAA has been triggered.
Typically, because of the MPAA of £4,000, this figure will be around £36,000 for those with defined benefits accrual.
Tapered annual allowance
While the impact of the MPAA clearly impacts members of defined contribution schemes to a significantly greater extent than members of defined benefit schemes the same cannot be said for the tapered annual allowance.
Statistics revealed in recent months indicate we have seen significant increases in annual allowance charges in the last few tax years, with the majority relating to accrual under defined benefit schemes.
The tapered annual allowance creates problems in the private sector because the level of the allowance is affected by an income calculation that may not be calculable until the end of the tax year, but it is creating disproportionately significant issues within parts of the public sector.
Stories of doctors and teachers leaving their pension or even quitting work because of the impact of these allowances do not make great reading.
A detailed breakdown of the taper is beyond the scope of this article. Perhaps the most important advice point to remember is the fact that the income calculation, which plays a fundamental role in setting the allowance, includes investment income, not just a client’s salary.
Having opened by discussing the confusion which has been caused for more than 10 years by the interaction between an earnings-based limit and the annual allowance, it is fitting that we close by highlighting an area where we are likely to see more confusion in years to come.
Gareth James is head of technical at AJ Bell
