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Aligning pension input periods post the Summer Budget

Claire Trott, head of Pensions Technical, Talbot and Muir, looks at the practical implications of the new rule on pension input periods (PIPs)

Due to the introduction of the taper of the annual allowance for those earning over £150,000 which is tied to tax years, the Government has decided to move all pension input periods (PIPs) to match the tax year. There are transitional rules that have been brought in immediately (8 July 2015) and may impact on what contributions clients can make going forward. All PIPs have been ended on the 8 July 2015 and all members will start a new PIP on 9 July 2015 running until the end of the tax year. Going forward there will be no scope to move the end date of PIPs and they may well be abolished entirely.

In order to work out the maximum, this tax year will be split into two ‘mini tax years’ for the purposes of calculating the annual allowance an individual has. The first mini tax year is called the pre-alignment tax year and has an annual allowance of £80,000. The second mini tax year is called the post alignment tax year and has no annual allowance of its own but you can use any unused annual allowance from the pre alignment tax year up to a maximum of £40,000.

This may all sound overly complicated but it means that those who have already paid contributions for the annual allowance which would have ended in the tax year 2016/17 will not suddenly face an annual allowance charge because their pension input period is being forcibly closed.

Examples

Example 1

If someone has already paid into a pension input period that ends in this tax year and opened a new one then this new one will now have ended on the 8 July, which means they will now have three PIPs that end in the tax year 2015/16. If they have already made maximum contributions then they are not entitled to make any more.

Talbot & Muir Graphic 1

 

If they do pay more contributions and they don’t have any unused relief through carry forward then they will be subject to an annual allowance charge.

Example 2

If they hadn’t paid the maximum into PIP 1 or PIP 2 then they would be entitled to pay in the residual into PIP 3 up to a maximum of £40,000 without incurring an annual allowance charge. In this example they paid £20,000 in PIP 2 so have a residual £20,000 annual allowance for use in the post alignement tax year.

Talbot & Muir Graphic 2

 

Example 3

Many people actually already have their PIPs aligned to the tax year and what they are entitled to pay will depend on what they have already paid this year.

Talbot & Muir Graphic 3

 

If someone has already paid £40,000 then because the pre alignment tax year has an annual allowance of £80,000 they are entitled to pay an additional £40,000 into the PIP which ends in the post alignment tax year.

Example 4

For those that haven’t paid any contributions so far this tax year, then they will be limited to only paying £40,000 because even though the pre alignment tax year has an annual allowance of £80,000 only a maximum of £40,000 can be carried over into the post alignment tax year.

Talbot & Muir Graphic 4

 

From the above example you will be able to see that should they have paid some contributions the residual of the £80,000 can be paid into the post alignment tax year, up to the maximum of £40,000 just as in Example 2.

Carry forward

Carry forward will remain for those who are entitled to it. The £80,000 applicable to this tax year must be used before previous tax years just as normal and it will count as a single annual allowance for the purposes of carry forward in the future, but you cannot carry forward more that £40,000 from this tax year to future years should the whole allowance not be used.

Money purchase annual allowance rules

Where someone has flexibly accessed their pension savings and they are subject to the money purchase annual allowance rules the maximum for the pre alignment tax year is £20,000. If this isn’t fully used in the pre alignment tax year then up to £10,000 can be carried over into the post alignment tax year.

It should be remembered that the money purchase annual allowance rules only apply to money purchase contributions and any final salary accrual can use the full annual allowance, less any money purchase contributions up to the maximum allowable.

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