Pension Input Period changes explained
PENSION INPUT PERIOD ALIGNMENT
Changes announced in the Summer Budget (2015) had an immediate impact on PIPs
The Summer Budget made some changes to the Annual Allowance for those with earnings in excess of £150,000 with effect from April 2016. However, in order to bring this in at the beginning of the new tax year it is necessary to ensure that all pension input periods are aligned to the tax year and this requires a little more planning and thought during the transitional period between Budget day (8th July) and the end of this tax year.
The Finance Bill 2015 contains the provisions to make the necessary legislative changes.
From 6 April 2016 all pension input periods will be aligned to the tax year and will run from 6th April -5th April. The ability to vary the pension input periods end dates has been removed.
This bulletin will look at how the transitional period work in relation to current pension input periods in the run up to 6th April 2016.
Current pension input periods
All pension input periods were ended on 8th July. Because of this ‘forced closure’ it was possible for individuals to have had 2 or more pension input periods ending in the 2015/16 tax year
Eg. Fred’s pension input period ran from 10th April 2014 -9th April 2015. This PIP ends in the 2015/16 tax year. His new PIP began on 10th April and has now been closed on 8th July. Giving him a second pension input period ending in the 2015/16 tax year.
All new PIPs started on 9th July 2015 and will end on 5th April 2016.
In the example of Fred above, he will then have 3 pension input periods ending in the 2015/16 tax year.
For this reason the annual allowance has been increased to £80,000 for this tax year (2015/16).
Two mini tax years
The 2015/16 has been split into two mini tax years. The first part is from 6th April -8th July and this is called the prealignment tax year. The annual allowance for this part is £80,000 (plus any carry forward from the 3 previous tax years).
The second mini tax year runs from 9th July to 5th April 2016 and is known as the post alignment tax year. This mini tax year has a nil annual allowance but has the ability to use carry forward from the prealignment year of up to £40,000.
So how does this work in practice?
Continuing the example of Fred above, Fred made a gross contribution of £40,000 to his SIPP which was for the PIP ending 9th April.
Fred then made a further £10,000 contribution to his SIPP which now has a PIP end date of 8th July.
Fred has therefore paid £50,000 out of a possible maximum of £80,000.
Fred has a maximum further contribution of £80,000-50,000 = £30,000 to make in the post alignment tax year, subject to having sufficient earnings if a member or personal contribution.
More examples of how the annual allowance works in practice:
Barney’s PIP runs from 6th June-5th June
Next PIP will run from 6th June to 8th July (the pre alignment PIP).
Barney pays £500 gross employee contribution per month and his employer pays £1,000 per month into his only pension fund. Payment date is 1st month.
Barney has paid: 12 payments of £1500 = 18,000 into the first PIP
Second PIP: 1 payment of £1500.
Maximum contribution for post alignment PIP is £40,000.
Wilma’s PIP runs from 1st Sept and was ended on 8th July. She paid £40,000 in that PIP so she has a maximum contribution of £40,000 in the post alignment year.
Betty’s PIP runs from 1st June – 31st May and she has paid the full annual allowance at the beginning of every PIP. She had therefore paid £40,000 to the PIP ending 31st May 2015, £40,000 in the PIP ending on the 8th July. Betty is unable to make any contributions in the post alignment PIP as she has already used up her full £80,000 annual allowance for 2015/16 in the pre-alignment PIP.
She may have unused annual allowance from the 2012/13, 2013/14 or 2014/15 tax years which she could carry forward.
How to calculate the Annual Allowance (Defined Contribution)
Calculation of the DC input is based on contributions made in the tax year – there is no change to this other than separate records need to be kept for each mini tax year.
The Impact of the Money Purchase Annual Allowance
Following the changes announced on 8 July 2015, there are also amended money purchase annual allowance rules if an individual flexibly accesses their pension savings during 2015 to 2016.
If flexible access has occurred in the pre-alignment tax year, the money purchase annual allowance for savings made during the pre-alignment tax year is £20,000, and the alternative annual allowance for this period is £60,000.
The money purchase annual allowance for savings made during the post-alignment tax year is the amount of the £20,000 that has not been used from the pre-alignment tax year, subject to a maximum of £10,000. The alternative annual allowance will be nil but again any unused annual allowance from the pre-alignment tax year and any unused annual allowance from 2012 to 2013, 2013 to 2014 or 2014 to 2015 can be added to this.
If flexible access occurs in the post-alignment tax year, the money purchase annual allowance for savings made during the post-alignment tax year is £10,000 and the alternative annual allowance will be up to £30,000.
In the 2015/16 tax year, carry forward can still be used for 2012/13, 2013/14 and 2014/15 providing the full allowance has been made in 2015/16 (which is either £40,000 or £80,000 depending if contributions have been made in wither the pre and or post alignment tax years)
For tax years 2016/17 onwards, carry forward from 2015/16 can be used subject to a maximum of £40,000 less any amount paid in the post alignment tax year.
Our understanding is based on the draft Finance Bill 2015 and the Technical Note issued by HMRC on 8th July. The draft legislation could be subject to change as the Bill proceeds through Parliament. We will update this bulletin with any changes.