HMRC and HM Treasury has recently published its decisions and summary of responses to its December 2010 consultation on how to manage high annual allowance (AA) charges from pension benefits (see previous bulletin).

The consultation was issued following concerns that the reduction in annual allowance (due to be implemented on 6 April 2011) might lead to individuals incurring a significant tax liability that they would not be able to meet through income.

Following the analysis of the general trend in 69 formal written responses, the government has now confirmed the following in relation to its policy on this:

  • AA charges will be paid at the point at which they arise rather than being rolled over until the member draws his benefits (the latter is regarded as more administratively burdensome);
  • where a member’s savings in a scheme exceed the AA for the relevant year, the scheme must offer a ‘scheme pays’ policy, at no additional cost to the member (this does not apply where the member has exceeded the AA due to a savings across a number of schemes); and
  • the eligibility threshold for members to be entitled to meet an AA from pension benefits is to be set at a minimum of £2000.  

The £2000 threshold is considered to be quite low and is arguably quite onerous on scheme administrators. However, HMRC’s reasoning was that the individual’s ability to manage the liability would be a greater difficulty.

Scheme administrators are advised to review the scheme rules and consider what amendments are needed in order to implement the facility.

Please click on the following link to view the accompanying ministerial statement online.