As part of The Verve Group’s #FYIfinance series, our very own Alex Buckle was featured to give the low down on all things being a paraplanner…

Not many people have heard of the paraplanning role in financial services, including Alex, who explains how she got into the industry below…

“I first came across the role of a paraplanner whilst applying for jobs after my degree. Having studied Psychology, where my days were full of Pavlov’s dogs and Skinner’s pigeons, it was fairly daunting entering the finance world. I was initially drawn to the role, however, by the promise of a new challenge every day and that having an analytical mind would come in handy.

In terms of an average day in the life of a Paraplanner, it’s hard to say, as every day is different. But I will usually be writing reports and/or carrying out research. The latter can range from tax calculations to provider and investment strategy research, using various software, such as FE Analytics or CashCalc. In more recent times, I have also been more involved in rebuilding our reports, making them more fun, digestible and interactive, and the feedback has been very positive so far. I am fortunate to be a part of a team who strives to be bold, confident and introduce new ways of working together within the financial sector.

A big part of being a paraplanner is sitting exams to further our knowledge. Therefore, a big challenge is being able to juggle a busy day at work with revising towards exams, all whilst trying to maintain a social life and pretending that I like going to the gym. Time management, a strong work ethic and a willingness to learn are therefore very important as a paraplanner.

I have learnt a lot over my three years in role, and the various exams – from what a pension actually is, and why it’s important to have one, and how I should approach getting a mortgage. You know, all the useful things that no one thinks to tell you in school, but can really help in the real world.

My top tip for those seeking a career in finance (and to those who may not even know they are yet) – don’t worry if you don’t think you have the right experience to work in the financial sector. I can’t emphasise enough how little I knew about finance before working at Para-Sols. In fact, it’s probably like a game of ‘Where’s Wally’ trying to find someone who did a Finance related degree in our office. There are so many life skills that are transferable to a role in finance. For example, in our office, we have roles which rely heavily on skills in terms of marketing, organisation, technical knowledge, time management, and the list goes on.”

Alex Buckle – Paraplanner

You may have seen recent articles and statements on slight changes to the way HMRC deal with bond chargeable events. You may, or may not, have also heard about a tribunal ruling in April which HMRC lost (but are appealing) about the way in which an investor’s Personal Allowance is dealt with when surrendering a bond. This article covers how bond gains are assessed for tax and considers the Personal Allowance aspect.

Top slicing and surrenders

The development here is accounting for the Personal Savings Allowance (PSA) when dealing with surrenders of both Onshore and Offshore bonds. A significant number of clients are likely to have some or all of entitlement to a PSA. As a reminder, these rates for 2019/20 are:

  • PSA is £1,000 if total income (which includes the gross bond gain) is below the higher rate tax threshold.
  • PSA is £500 if total income (again including the gross bond gain) is above the higher rate tax threshold but below the additional rate threshold.
  • No PSA if income (including gross bond gain) is above the additional rate threshold.

Scotland; the PSA is set and covers the whole of the UK and so for the purposes of entitlement to PSA, the tax bands used in England, Wales and Northern Ireland should be used (note, this could create a quirk where a Scottish Higher Rate taxpayer is entitled to the Basic Rate PSA).

Calculating the gain and tax payable is governed by a 5-step process. For the purposes of this calculation, we will assume an investor has an offshore bond valued at £80,000 which was bought for £60,000 five years ago. The client’s income (non-Scottish taxpayer) is £43,000.

Step 1: Calculate total income for the client, considering where the gain falls

Client total income: £43,000.

Bond gain: £20,000.

No savings income or dividend income.

Total: £63,000.

PSA entitlement is the full £500 based on the above total income.

Step 2: Calculate the overall tax liability on the bond gain – Deduct a basic rate tax credit from the total gain (even with an offshore bond)

Bond gain: £20,000.

Amount in basic rate threshold: £7,000.

Tax at 20%: £1,400.

Amount in higher rate threshold: £13,000.

Tax at 40%: £5,200.

Total: £6,600.

–  Basic rate tax credit on full bond gain: £4,000.

–  Tax of £6,600 minus credit of £4,000 = £2,600 liability.

Step 3: Calculate the annual equivalent (top-slice)

Full gain of £20,000.

Divided by 5 years.

Annual equivalent: £4,000.

Step 4: Calculate liability to tax on the annual equivalent. Note: use any PSA available here to reduce the gain. Reduce the tax figure by a basic rate tax credit previously used (even though this is an offshore bond)

Annual equivalent: £4,000.

Minus Higher rate PSA of £500 = £3,500.

Taxed at 20% = £700.

Minus basic rate credit of 20% on the whole slice = £800.

£700 – £800 = nil.

The above figure is the ‘relieved liability’ which will be negative if all of the slice is within the basic rate band (due to the PSA).

Step 5: Deduct the figure in ‘Step 4’ from ‘Step 2’ to find the top-slicing relief provided

£2,600 liability minus £0 = £2,600.

The overall tax charge of £6,600 can be relieved through top-slicing by £2,600. This gives a charge of £4,000.

The charge of £4,000 is also simply the result of applying basic rate tax to the whole gain of £20,000 which reflects the more traditional approach of noting that the top slice will be below the higher rate threshold and applying basic rate tax to the gain as a whole.

Where the ‘annual equivalent’ (the top slice) straddles the basic and higher rate bands, however, the steps here will ensure the correct process is used.

This can be shown by changing the client’s income to £48,000 per annum and running through the steps again:

Step 1: Calculate total income

Total Income (£48,000) plus bond gain (£20,000) = £68,000.

PSA is again, £500.

Step 2: Calculate total tax liability

Bond gain: £20,000

Amount in basic rate threshold: £2,000

Tax at 20%: £400

Amount in higher rate threshold: £18,000

Tax at 40%: £7,200

Total: £7,600

–  Basic rate tax credit on full bond gain: £4,000

–  Tax of £7,600 minus credit of £4,000 = £3,600 liability

Step 3: Calculate the annual equivalent – as before £4,000

Step 4: Calculate liability to tax on the annual equivalent

Annual equivalent: £4,000

Minus Higher rate PSA of £500 = £3,500

£2,000 within Basic $ate tax band charged at 20%: £400

£1,500 within Higher Rate tax band charge at 40% = £600

= £1,000

Minus basic rate credit of 20% on whole slice = £800

£1,000 – £800 = £200

Step 5: Deduct the figure in ‘Step 4’ from ‘Step 2’ to find the top slicing relief provided

£3,600 liability minus £200 = £3,200

The overall tax charge of £7,600 can be relieved through top-slicing by £3,200. This gives a charge of £4,400.
The Personal Savings Allowance provided relief against tax and the use of the remaining basic rate tax band provided relief against the whole gain being taxed at 40%.

If the above bond were Onshore, a basic rate tax credit of 20% on the whole gain (again £4,000) would be used at the very end to reduce the tax payable to £400.

Personal Allowance

The background of this is a bond surrender case in which HMRC lost a claim brought by an individual. The summary can be found here or here.

For years, individuals have been basing entitlement to Personal Allowance on the full gain on the bond (i.e. no accounting for top slicing for this test) and this has had the unwelcome effect of a large bond gain being untaxable in itself (due to top slicing) but causing other earned income to suffer tax.

The main implication of this is that we see income earned elsewhere now subject to Basic Rate tax. This has the effect of incurring an extra £2,500 in income tax in cases (based on 2019/20 Personal Allowance of £12,500).

The more damaging implication for clients will be where the loss of the Personal Allowance results in the top sliced gain crossing the (now reduced) threshold for higher rate tax.

With a full Personal Allowance, an individual can have an income of £50,000 (£12,500 Personal Allowance and £37,500 Basic Rate bracket) before Higher Rate tax is an issue.

If the Personal Allowance is lost through the gross bond gain being of sufficient value, the top sliced bond gain and all other income will need to be below £37,500 to avoid the double whammy of creating tax charges on the bond surrender.

As an example, if a bond that started at £200,000 was invested for 20 years and had a surrender value of £350,000, the gain would be £150,000. Top sliced, this would be £7,500.

If a client had earnings above £30,000 from elsewhere, the top slice would fall within the Higher Rate threshold and create a greater tax liability for the bond surrender. It would also result in £12,500 of those earnings elsewhere being taxed at 20% rather than a zero rate.

The ruling could, however, change this. If this is upheld, it could be a case that the top slice is added to earnings with the Personal Allowance still in place. In this scenario, £30,000 + £7,500 is well within the £50,000 limit to avoid Higher Rate tax. It would seem that the Personal Allowance remains lost for the purposes of taxing other income, but this would at least avoid two elements coming into tax at once.

Regardless of the development of the ruling, it still makes sense to keep a gross bond gain below £100,000 when added to other income. If a bond has more than one segment, it is relatively straightforward to surrender across segments to create the level of gain needed. With only a single segment bond, however, partial surrender (i.e. an excess event) is required and more care is needed here (as the chargeable gain is not necessarily related to economic performance of the investment).

Grant Callaghan – Head of Paraplanning



When you exceed the annual allowance through accrual in a final salary scheme, there is the option of ‘scheme pays’ where part of the pension is commuted for a lump sum used to pay the scheme charge.

A deduction is usually made in the year in question and the final salary benefits are permanently reduced from this point. This is usually the end of it. The NHS pension system operates slightly differently in that the payment of a ‘scheme pays’ lump sum is a loan that is recouped when the member eventually takes benefits.

The ‘loan’ attracts interest of 2.80% plus the rate of Consumer Price Index (CPI) inflation so can easily end up exceeding 5% per annum.

It is therefore worth considering whether the default option of reverting to scheme pays stacks up for NHS members.

In 2016/17, the NHS paid out £35 million worth of ‘scheme pays’ lump sums across 3,949 member requests. This year however was prior to the change in rules that allowed scheme pays to be for members subject to the tapered annual allowance. It is therefore reasonable to expect the number to be higher going forward.

Case Study

For simplicity, we will assume we have a 55-year-old individual earning £113,000 per annum. They are a member of 1995 and 2015 section and so have accrual in both schemes. For the 2017/18 tax year their accrual was as follows:

1995 Section: £24,000

2015 Section: £53,000

Total:               £77,000

We will assume that no carry forward is available.

As is becoming increasingly common in the NHS scheme is the impact of a tapered annual allowance. The Threshold Income is above £110,000 and that means we need to calculate the Adjusted Income.

£113,000 per annum earnings + £77,000 ‘employer contributions’ = £190,000

£23,000 of contributions are personal and these can be subtracted

£190,000 – £23,000 – £150,000 = £17,000 excess

At a rate of £1 for every £2 exceeding, £8,500 of annual allowance is lost

The allowance for 2017/18 is therefore £32,500.

We therefore have an excess of £44,500

Based on earnings for the year, the excess would be taxable as follows:

£37,000 at higher rate tax: £14,800

£6,500 at additional rate tax: £2,925

Total: £17,725 (ouch!)

Note: If this individual’s earnings had been below £110,000, they would have escaped any tapering of the annual allowance. This would have resulted in the contribution amount being £37,000 above the £40,000 standard annual allowance which would have resulted in a tax charge of £14,800.

There has been recent press articles about the effective tax rate of over 100% on earnings that tip individuals over £110,000. This is through a combination of the Personal Allowance 60% tax trap and the fact that, in this example, earnings of £3,000 can create additional tax implications of £3,725 (above the income tax and NI the extra £3,000 is already subject to).

‘Scheme Pays’

Assuming the client does not want to pay £17,725 personally, they would elect for ‘Scheme Pays’ and have the NHS pay the whole amount.

The charge is apportioned between the two schemes so represents a tax charge of:

£5,524.67 (1995 Section)

£12,200.33 (2015 Section)

As mentioned earlier, the £17,725 charge is considered as a loan from the NHS to the member. If we assume CPI inflation of 2.50% and no change to the interest figure of 2.80% (which has been the case since 2016), the increase would be 5.30% per annum.

In five years’ time, this charge has now increased to £22,947.12. Apportioned between the two schemes:

£7,152.35 (1995 Section)

£15,794.77 (2015 Section)

This is how much each section of the scheme owes the NHS. We can now commute the pension for these lump sums. The current factors for a 55-year-old are:

19.70:1 for the 1995 Section (normal retirement age of 60)

11.80:1 for the 2015 Section (normal retirement age of 67)

If we apply these commutation rates the reduction in benefits would be:

£363.06 per annum (1995 section)

£1,338.54 per annum (2015 section)

Total: £1,701.60 per annum

Another way of looking at this is that by paying a lump sum of £17,725 to settle the tax charge, pension income of £1,701.60 per annum is retained in the scheme. This is effectively a ‘reverse’ annuity rate of nearly 10%.

There are a lot more variables to consider but here are how the personal circumstances of a client could influence the thinking:

Lifetime allowance position

  • If the client is currently close to breaching the allowance, seeing the scheme pension reduced by such an amount might be less of a disadvantage (as the 25% charge on excess will reduce a lot of a ‘gain’ of having paid the scheme pay charge up front.
  • Conversely, if LTA is unlikely to be breached, this could make paying the charge directly more attractive.

Potential tax position

  • If the marginal pension in question is likely to be taxed at higher rate tax, this reduces the attractiveness of maximising it at the expense of already taxed capital that would otherwise be used to make the scheme pays’ payment.
  • Even allowing for basic rate tax will reduce the relative value of the pension.

Length of time until access

  • The nature of 2.80% plus CPI makes the compounding nature of the loan a higher burden on the pension over a longer-time frame.
  • Shorter time frames are less likely to create as much distortion (although our example shows the effect over only five years).

Family planning

  • There is more scope for wealth planning across generations through cash deposits in the short-term, compared to a higher pension income in the long-term. For those with already secure and sufficient retirement income prospects the retaining of capital will probably be preferable.

Contributions being made

  • Contribution rates are a double-digit percentage for most earners over £50,000 and it can be worth considering how the value actually being contributed as a member of the scheme links with the possible lump sum tax charge and/or benefit that might be accrued.

Additional points to consider would be the source of the lump sum that could be used to pay the tax charge directly. If this is from post- higher rate tax income then it would feel like a double (and very high) tax charge.

It could be thought of as around £30,000 of income paying both £12,000 in income tax and £17,725 in pension annual allowance tax.


Compared to the options in private final salary schemes, the ‘scheme pays’ function of NHS members needs more thought and consideration. Short of leaving the scheme (which is almost never advisable) these members cannot really plan their way around a tax charge in the scheme.

There could however be scenarios where it makes sense to consider a direct payment of the tax charge incurred, or to have the scheme pay the charge. It may even be advisable to approach this in different ways in different years.

Recent press suggests that a number of individuals are already looking at their income position and actively turning down shifts over fear of the £110,000 threshold. This remains potentially the only major tax planning option in regards to pension accumulation in the scheme.

How we help

Annual allowance and tax charge calculations are something we offer as standalone research services. We can cover research and report writing on all aspects of pension contribution / annual allowance and carry forward services. Contact us at or 01325 281 969 if you would like further information.

There is a lot of planning merit in looking at the nature of death benefits paid by an existing defined contribution scheme as part of the initial analysis process. Most schemes will typically provide the following (assuming a return of fund benefit):

  • A cash lump sum payable to the nominated beneficiaries.
  • The option of a cash lump sum or transfer to another pension provider for annuity purchase / Nominee Drawdown use.
  • All of the above.

The main disadvantages facing the client and their family from holding pension funds under the first option are:

  • A return of fund lump sum benefit would fall within the survivors’ estate. If this is the spouse there would then be pressure on ensuring this not subject to inheritance tax (and would have defeated the whole IHT efficiency of pension funds purpose).
  • Loss of tax efficiency. If the capital is not required in the short-term then the removal of funds from a tax efficient pension wrapper could result in tax payable and the inability (based on high values) to shelter the funds tax efficiently in good time.

There is however a third issue related to the Lifetime Allowance, which the following case study highlights.


The client, aged 66, has recently put a Defined Benefit pension into payment which was initially worth £42,586 per annum plus  a lump sum of £185,000. For the Lifetime Allowance test this was calculated as being £1,036,720 (£42,586 x 20 + lump sum). The necessary Lifetime Allowance tax charge, through commutation of the pension income, has been paid.

The client now has no Lifetime Allowance remaining. There is however an uncrystallised pot worth £56,254 in place which the client is requiring advice on.

In the current format, the pension provider will only pay a benefit on death as a cash lump sum. This would be tested against the lifetime and would, as a lump sum payment, attract the tax charge of 55%. Assuming death were now, the position would be as follows:

£56,254 x 55% = £30,939.70 tax paid

£25,314.30 lump sum paid to beneficiary

The lump sum is not taxed any further as death was prior to the age of 75.

If the client moved their funds to a more flexible provider, the plan could pass to the nominated beneficiary as a nominee drawdown pension. As an income, this would be taxed at 25%:

£56,254 x 25% = £14,063.50 tax paid

£42,190.50 paid to a Nominee Drawdown Pension in the beneficiary’s name

As the client was younger than 75 on death, no further tax is payable on withdrawals made by the beneficiary in respect of their Nominee Drawdown Pension. This has a tax advantage as follows:

Tax paid under the lump sum option: £30,939.70

Tax paid under the Nominee Drawdown option: £14,063.50

Difference: £16,8m/ 76.20


Through a different pension structure, £16,876.20 less tax can be taken from the pension on death.

The Lifetime Allowance, at £1,030,000 for 2018/19 and increasing by CPI each year, is likely to trap more clients over the coming years.

With the unknown of how future legislation might change the Lifetime Allowance, particularly given what has happened over the last 10 years, planning affected client’s retirements is becoming increasingly difficult.

The main question we pose or see considered when looking at a flexible retirement strategy for clients with Lifetime allowance considerations is:

Is it potentially more efficient to crystallise up to the Lifetime Allowance, diverting future growth to a non-pension wrapper, or to use the flexibility of a series of UFPLS’ over the course of retirement?

We can consider the options for one particular client.


Mr Jones, aged 62, has a pension fund worth £1,136,784 and has no entitlement to Fixed or Individual Protection. In 2018/19, the Lifetime Allowance applicable is £1,030,000. Mr Jones would like to commence an immediate retirement income strategy achieving £35,000 gross per annum.

He would also like to access a lump sum of £115,000 in 2023.

The assumptions used in considering his options are:

  • CPI inflation of 2.50% per annum
  • £35,000 per annum income need increasing by the rate of CPI
  • Investment returns of 5.00% per annum after fees

Crystallising up to the Lifetime Allowance

The first option to consider is immediately crystallising £1,030,000 and re-investing the £257,500 tax-free cash in a GIA/ISA portfolio.

The act of crystallisation results in the following pension split:

Funds crystallised and in drawdown: £772,500

Funds uncrystallised: £106,784

Total: £879,284

Mr Jones will be withdrawing £35,000 per annum from crystallised funds for as long as possible and has no Lifetime Allowance remaining.

He does not need to access the pension for a lump sum as this can be sourced from the investment portfolio. The projection to age 75 would be as follows:

  • Crystallised fund value: £720,478
  • Uncrystallised fund value: £191,769

The crystallised value is lower than the value designated to drawdown in 2018 so it is only the uncrystallised value that attracts a Lifetime Allowance tax charge.

A 25% tax charge would result in Lifetime Allowance excess tax of £47,942

The 55% tax charge is not applicable as the age 75 test is not one in which benefits are being taken.

Using a series of Uncrystallised Fund Pension Lump Sum (UFPLS)

Under this option, £35,000 gross will be withdrawn from the pension each year as a UFPLS. In 2023, £115,000 will be withdrawn as tax-free cash in line with the client’s objectives and the UFPLS each year will continue.

The projected figures at 75:

  • Crystallised fund value: £576,704
  • Uncrystallised fund value: £818,200

The lifetime allowance has not been used in full and based on the £35,000 per annum UFPLS’ and a single tax-free cash withdrawal in 2023, there is 15.56% of the allowance remaining.

  • Lifetime Allowance in 2031: £1,419,866
  • Amount of Lifetime Allowance remaining: £220,898

The Lifetime Allowance tax charge at 75:

Crystallised fund excess Uncrystallised fund excess Lifetime Allowance remaining Excess amount Tax charge at 25%
£56,256* £818,200 £220,898 £653,558 £163,389

*Value of crystallised funds minus amount originally designated to drawdown


Option Tax at age 75 Post 75 Pension value
Use Lifetime allowance £47,942 £864,305
Annual UFPLS £163,389 (£115,447 more in tax) £1,231,515 (£367,218 more in a pension)

While the tax position appears more favourable when using the Lifetime Allowance in full immediately, there are considerations that might outweigh the possible tax advantages:

  • Lifetime Allowance changes: Using the Lifetime Allowance in 2018 leaves no room to benefit from future changes to the limit. Any further reduction in the LTA would likely be accompanied by protection available to affected individuals while there is maximum potential to benefit from an uplift in the allowance.
  • Potential IHT implications: If this money is not spent, gifted or invested in Business Property Relief assets, death in the short-term could result in a higher amount of tax payable.
  • No tax-free cash entitlement remaining: This could impact on planning around a future increase in taxable income available to the client. UFPLS would preserve the TFC, which could be used in isolation strategically in certain years.

In summary, the tax implications can be substantial, but a large part of the decision making will depend on future changes, and as we do not have a crystal ball, this makes it largely guess work. The joys of financial planning!

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Here at Para-Sols we’ve seen a noticeable increase in the amount of cases focusing on inheritance tax planning. In our latest blog, Simon discusses the use of IHT schemes and their merits.

In 2016/17, IHT receipts were £4.8bn, a 4% increase from the previous year and the highest level under the current system. This creates a dilemma for many of the ageing population, when you consider the ever-rising cost of long-term care and the number of people in care expected to double by 2035.

As a result, the exercise of gifting money into either a trust or directly to an individual or family members is not an attractive one to some, as control over assets/capital is important in the event of long-term care being required.

Whilst there isn’t a ‘one size fits all solution’, the use of various IHT schemes can be a useful aid to compliment a wider IHT mitigation strategy. Previously, such schemes were almost exclusively marketed to wealthy investors, however the average minimum subscription for new Business Property Relief (BPR) investments was recently calculated at £13,810 (May 2017), as opposed to £50,000 before June 2016.

Whilst some may think exclusively of the Alternative Investment Market (AIM), and the level of volatility and risk that comes with such investments when considering IHT schemes, this is not necessarily the case. Many IHT schemes target capital preservation, with some deferring their annual fees unless the pre-determined target return is achieved (usually somewhere between 2-4% per annum).

With such investments only needing to be held for 2 years to become (potentially) IHT exempt, this can provide an attractive option, especially for the older investor. Couple that with retaining complete control over the capital, in the event funds are required in the future, such as for long-term care costs. This is a theme that seems to becoming more and more common.

Clearly, there are still risks with such investments, most notably the fact that there is no guarantee any investment will qualify for BPR, as this is only assessed upon an individual’s death. However, as part of a wider IHT mitigation strategy, such IHT schemes can provide a relatively quick and useful method of potentially reducing one’s liability, whilst retaining full control of the capital.

We come across a variety of solutions to help mitigate IHT liabilities, so as always, please just feel free to give us a call and have a chat to one of the team about potential solutions and let us help with any research you need to come up with the most suitable solution.

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Recent press coverage of the problems in Defined Benefit funding and the combination of factors leading to increased transfer values, has led to a substantial increase in people looking at the options of transferring their funds to a personal pension.

The recent FCA paper suggesting a change away from the traditional TVAS and critical yield guidance, although in the absence of any concrete alternative measures, the critical yield is still seen as a major factor when reviewing the value of defined benefits schemes. However, looking instead at a drawdown option can shed unseen light on the suitability of transfer.


Claude is aged 51 and has received a CETV of £187,000. He was a member of the scheme from September 1999 to May 2004.

The pension income in May 2004 was £3,365 per annum and based on the revaluation, would be £6,002 at his normal retirement age of 60. This income escalates by RPI up to 5.00% per annum.

Assuming total costs for a new pension of 1.58% per annum, the critical yield has been calculated as 8.24% per annum.

This yield is high and one unlikely to be achievable unless a particularly aggressive risk approach is adopted.

Looking at it from a drawdown perspective, however, we can take the CETV and assume growth on this to age 60. We would then take the £6,002 per annum figure in line with the scheme benefits, and calculate what would be required as a return for this to be sustainably withdrawn while increasing by 2.50% each year.

An analysis of this type shows that a return of 4.12% per annum would be required pre- and post-retirement to provide the income until age 100. This includes the investment charges of 1.58% per annum.

Taking the income until age 110, in effect 50 years from the starting point, would require 4.85% per annum returns.


To replicate scheme benefits Critical Yield
Annuity purchase at age 60 8.24% per annum
Drawdown from age 60 to 100 4.12% per annum
Drawdown from age 60 to 110 4.85% per annum

Of course no account here is taken of the client objectives, considerations in terms of their risk and capacity for loss and their overall feelings towards the transfer of risk to them, from the scheme.

However, a full drawdown analysis does offer an alternative consideration to the critical yield, which has historically always been based on the fact an annuity had to be purchased by 75.

What this comparison shows is that the yield required to match the income, is much lower with drawdown than it is via an annuity, in no small part due to the extremely low annuity rates currently available. Much like the critical yield, the drawdown growth figure is only one part of the overall picture, as other factors such as a client’s poor health could affect the annuity rate available, and therefore the relevant critical yield.

We would however suggest that it is a more appropriate starting figure than the current standard critical yield and would like to see the FCA guidance reflect something similar in future.

April 6th 2016 saw the introduction of a tapered annual pension contribution allowance for individuals with earnings over £150,000 or individuals who earn at least £110,000 per annum and have an adjusted earnings income exceeding £150,000.

The office of national statistics estimate that there are 790,000 taxpayers earning over £100,000 per annum with 347,000 of these additional rate taxpayers. This means there are a considerable number of individuals who may not be aware of a potential tax charge incurred through pension contributions, whether made personally, as company directors or part of an overall remuneration package.

The following looks at examples of individuals in this position, and what it means in terms of pension inputs and tax charges.

Income below £150k with high employer contributions and fringe benefits

If an individual has a salary of £140,000 per annum and receives employer contributions of £36,000 per annum then for the purposes of calculating their annual allowance the income figure to use is £176,000. What may not be considered is the fact that payments from the employer to a Private Medical Insurance arrangement are also included here. If the value in this instance were £1,400 this would increase income to £177,400.

£177,400 tapered down results in a loss of £13,700 annual allowance meaning the annual allowance in this case is £26,300.

£26,300 is clearly lower than the current contribution level of £36,000 and so would without action (or unused carry-forward) attract a tax charge of £4,365 (at additional rate of tax) on the £9,700 excess essentially bringing the contribution down to £31,635.


Alternative option 1

In this scenario, it could be possible to regain the full contribution allowance by taking the following steps:

  • Reducing employer contributions to £8,600 per annum.
  • Adjusted net income will be £150,000 per annum meaning the full allowance of £40,000 is available.
  • The unused difference, £31,400, can be contributed on a personal basis with a net contribution of £25,120.

This way the individual has access to the £40,000 allowance whilst also avoiding a potential tax charge on excess pension contributions made. It would also help in terms of the personal allowance tax trap.

This can be a useful strategy when the need to maximise pension contributions is important to the individual, whether for retirement or inheritance tax efficiency purposes.

This being said, reducing the employer contribution level and receiving a corresponding increase to remuneration would increase the adjusted income again leading back to a position where a tax charge could occur.


Alternative option 2

It may not be possible or ideal to drastically reduce the employer contribution level and there is an option to keep this as high as possible without incurring a tax charge. As the contributions affect the allowance, this is essentially a two-stage calculation explained as follows:

  • If the employer contributions were reduced to £29,500, this would reduce the adjusted income figure to £170,900 (£141,400 + £29,500).
  • £170,900, being £20,900 over, means only £10,450 is lost of the personal allowance.
  • This means the allowance is now £29,550.

By taking this action, the employer pension contributions are only reduced by £6,500 per annum with no tax charge incurred.

Again though, reducing employer contributions and receiving the difference in an alternative manner could nullify the benefits of the above action by increasing income and thus reducing the allowance available


Income below £150k with high contributions and an annual bonus

As the level of employer contributions affects the amount that can be contributed that year, there is a potentially unforeseen problem where significant annual bonuses form part of an individual’s remuneration.

A salary of £123,000 and employer contributions of £27,000 per annum mean that for the purposes of the annual allowance the income figure used is £150,000 per annum.

As is stands there is clearly no issue with exceeding the annual allowance with £40,000 available. In this scenario the individual may believe it to be wise to consider personal contributions to utilise this allowance in full

If however the individual receives a discretionary annual bonus which, in this 2016/17, was 20% of salary, the bonus of £24,600 would increase adjusted income to £174,600.

As a result of this bonus, the annual allowance is reduced by £12,300 to £26,700. As it stands, the bonus has resulted in the individual exceeding the annual allowance despite potentially believing their income was not at a level to become affected by the tapered allowance.

The main consideration here is the potential for a bonus. If an individual contributed up to £13,000 gross personally, perhaps early in the year, they would create a position for themselves where this whole amount would be an excess pension contribution and taxed at additional rate.



Those who have incomes over £110,000 (with and without bonuses) need to take care as to what the level of employer contributions they are receiving are, particularly if they are considering contributing personally.

Those with incomes over £150,000 and below £210,000 need to establish how much employer contributions they are receiving and what the resulting allowance for them is before they consider additional contributions.

The main catching point for employer contributions is that even a slight increase can create a potential issue, due to the nature of the contribution increasing the adjusted income which in turn further decreases the allowance available.

In 2016/17 there are likely to be a significant number of individuals who have some carry forward available to absorb any amounts over the tapered allowance, but this will create an additional consideration in future years when determining what total carry forward this individual might have.

It may ultimately be that for a number of individuals; it is difficult to establish exactly what the maximum contribution level is until the end of the tax year when the position with bonuses/increases to pension contributions can be established.







There will be a number of individuals with older pension plans, containing guaranteed annuity rates or guaranteed minimum pensions that look attractive considering the rates available now. A general trend for most individuals has been to increase flexibility and the position on death, at the expense of these guarantees.  For some individuals however there may be the option where the use of a guarantee on an older pension plan can tie in with basic retirement objectives and provide some tax efficient planning, at least over a short period of time.  The following example looks at this in more detail.


The client is 62 and had retired from his employers defined benefit scheme at 60, taking a pension of around £3,000 per annum. He does some self-employed part time work earning around £2,500 per annum, and has no real plan to stop this while he still enjoys it and is fit enough to continue with it.

His wife is already in receipt of state pension and a teachers’ pension providing a combined £15,000 per annum and these sources of income at this time are sufficient to meet expenditure needs, particularly as his full state pension will also come into payment in the not too distant future.

In addition to the pension in payment, he has a couple of uncrystallised pension arrangements with Aviva and Phoenix Life. He has not to date been pressed to look into these as the income elsewhere is meeting retirement needs.

He does however now need a capital lump sum for a few expenditure needs, namely a holiday and assistance with his daughters planned wedding. As him and his wife only have capital consisting of a £7,000 emergency fund, he wishes to consider his uncrystallised pensions to meeting this.

The Aviva plan is a stakeholder pension with a value of circa. £85,000 and the Phoenix Life a personal pension with a value of £47,000. The Phoenix Life plan has an enhanced entitlement to tax-free cash now worth just under 55% of the fund value at £25,596. To get this lump sum he would however have to purchase an annuity with the remainder. To take just the tax-free cash and designate the rest to drawdown, he would have to transfer and forfeit the enhancement.

The option to consider is taking the enhanced tax-free cash and selecting a level annuity with a 10-year guarantee and 50% spouse benefit. Based on his age and the rate offered, he will receive £774.72 per annum, paid monthly at £64.56.

As the income falls within his personal allowance, he can receive this tax-free. As there is no immediate need for the additional income, he can contribute this to the Aviva stakeholder plan he has.

These contributions of £64.56 per month will receive basic rate tax relief (as they fall within the higher of his earnings or £3,600 gross per annum) and each contribution will be grossed up to £80.70, (or £968.40 considered over 12 months).

This effectively provides ‘free’ tax relief and helps create further pension savings for later use, including more of a PCLS.
Most importantly, this secures the immediate enhanced tax-free cash of over £25,000 which is only available via an annuity purchase anyway. This makes the fact that an annuity needed to be purchased less of an issue as there is scope to gain extra from it at least in the next few years.

He can ideally continue to contribute the annuity to a pension while he pays no tax on the annuity itself but even if it became subject to basic rate tax, the contributions can continue (now being tax neutral and illustrated in the table below) for the provision of further PCLS in the future.

Contributions from the annuity:

Position Gross income Net Income Contribution Contribution with tax relief Difference
Nil Rate £64.56 £64.56 £64.56 £80.80 +£16.24
Basic Rate £64.56 £51.65 £51.65 £64.56 £0

Paraplanner Grant provides us with a great case study on a clients retirement income strategy using the state pension…


Client is 68 year old and he has been working full time as a higher rate taxpayer until September 2015. He has approximately £128,000 in cash reserves which since full and immediate retirement in September, he has been using to meet normal expenses.

Retirement assets consist of a fully crystallised pension valued at £470,000 and an onshore bond valued at £288,000, which commenced with an investment of £300,000 in June 2015, with no withdrawals taken since.

Having continued to work full time beyond his state pension age, he chose to defer the state pension. He now wishes instead of increasing the state pension payment to take this deferred income as a lump sum, which is permitted for those that reached state pension age before 6th April 2016. The lump sum will be used for discretionary spending purposes and will therefore not be considered as part of his immediate income requirements.

The ultimate retirement income goal is £3,000 net per month.


To meet the income objective from his assets and enable payment of the state pension lump sum in the most tax efficient manner, the structure can be as follows:

As the client is a higher rate taxpayer, in respect of his time employed from March 2015 to September 2015, it would be more efficient to continue to use cash deposits to fund needs until the new tax year starting April 6th 2016.
From here, the first thing to do is use the personal allowance available to him which for 2016/17 is £11,000.

The commencement of his deferred state pension provides £115 per week or approximately £5,980 of taxable income leaving just over £5,000 available within the allowance. We can instruct the crystallised personal pension to provide drawdown income payments totaling £5,000 per annum in the first year.
This provides just under £11,000 in taxable income keeping the client within the nil rate tax band.

He is still £25,000 per annum short of his retirement income target so we can look to the bond to assist with this.

The original bond investment of £300,000 means a tax deferred annual withdrawal of 5% would provide £15,000 per annum. As the client started the bond in June and has not taken any withdrawals since, he has some cumulative allowance left, which will be worth a whole year, 5% , by June 2016. Anticipating this, we can take an extra £10,000 over the year from the bond which keeps within the cumulative withdrawal allowance and provides the full £25,000 in addition to taxable income needed to meet his target of £36,000 per annum net.

The state pension he had deferred but now wishes to take as a lump sum can be paid to him immediately following the start of the 2016/17 tax year. The value of this is circa. £19,500 and the way this is taxed is the amount is charged at the marginal income tax rate the lump sum starts in rather than what bracket it would end up in.

The practical effect of this is that the marginal tax rate applied prior to when the lump is received is the tax rate applicable even if the value of the lump sum would take an individual into a higher bracket.

In this scenario, by keeping the taxable income element of retirement income for 2016/17 to below the personal allowance, the state pension lump sum can be paid and be applied to the nil rate tax bracket. This represents a tax saving of almost £4,000, compared to paying tax at basic rate, which is achieved by firstly deferring the lump sum until the 2016/17 year and then planning the way in which income needs are met in this year.

In future years, the income requirement can be achieved through maximum bond withdrawals with drawdown pension income meeting the remainder of the need.

State pension lump sum

Although the 6th April 2016 represents a change in the state pension and the abolition of the ability to defer the pension in exchange for a lump sum, individuals who reached SPA prior to this date could still defer and later take a lump sum. In addition, those already in receipt of the state pension could stop taking income and defer the pension in exchange for a future lump sum (this can only be done once.)

This means that while the rules are changing for new retirees, it is possible quite a significant number of individuals will have deferred or choose to defer their state pension in the coming years meaning awareness of the this lump sum taxation quirk can provide excellent tax planning potential.

Offshore Bond and use of personal allowances

We came across an unusual case recently, which involved a bit of head scratching, and so we thought we’d share it with you here as a case study, in case you come across a similar scenario with any of your clients….

The case involved a client potentially surrendering an offshore bond with a significantly large gain whilst the client is a nil rate taxpayer. For various reasons, the aim was to surrender the bond in full, in our analysis focused on the tax implications of this.


Client has state pension income of £6,000 per annum and bank account interest income of £1,000 per annum. She has an offshore bond set up just over 7 years ago which she has withdrawn from at times, but always keeping within the 5% annual allowance.

The original investment was £210,600 and after total withdrawals of £73,710 the value of the bond to surrender is £211,255.

Husband is a higher rate taxpayer and so there is no one better positioned to potentially assign the bond to prior to surrender.

We found it extremely difficult to find examples of someone with such low income, but such a potentially huge gain. The process we followed was:

First the gain is calculated as normal:

Current Value: £211,255

Total Withdrawals: £73,710 (no excess)

Adjusted Value: £284,965

Original Investment Amount: £210,600

Gain: £74,365

The next step was to take this gain and reduce it by any available savings allowance and personal allowances she has as a nil rate taxpayer.

Current taxable income: £6,000 leaving £4,600 Personal Allowance

Savings income: £1,000 leaving £4,000 of savings income allowance

Total allowances remaining £8,600

This allowance can be subtracted from the overall gain to arrive at the taxable gain.

Gain of £74,365 minus the combined remaining allowance of £8,600 = £65,765

We can then apply top slicing relief to the bond to establish what tax bracket the bond gain will be subject too.

Top Slicing relief = £65,765 divided by 7 full years = £9,395.

As we have used her personal and saving allowances to reduce the gain, the level of income applicable at this stage is now £15,600 (total of current income/interest plus remaining allowances used)

The top sliced gain added to this keeps her within the basic rate band (£24,995) and so the whole adjusted gain will be subject to basic rate tax at 20%.

Basic rate tax to pay will be 20% of the £65,765 adjusted gain = £13,153 tax payable


As noted, we found working examples of such a scenario almost impossible to find, despite spending many hours trawling technical and government websites – such fun! This does show the importance of factoring in remaining Personal Allowances and Savings Income Allowance on a bond surrender; for this client, it has resulted in an effective tax rate of around 6.2% which is pretty good for such a large surrender and high gains.