As discussed in our bulletin of 20 July, on 8 July the government confirmed a number of reforms to the pensions industry, including the tapering of the annual allowance. Possibly one of the most complex changes relates to the alignment of pension input periods (PIPs).
The annual allowance restricts the amount of tax relieved pension savings an individual can have in registered pension schemes in a tax year. For these purposes, pension savings are measured over a time period (the PIP). Until recently, schemes (or the member in the case of DC) could nominate the time period. If no PIP had been nominated, a default applied.
Tapering of annual allowance
The government announced on 8 July 2015, that for the 2016/2017 tax year onwards the annual allowance will be reduced for those with incomes of over £150,000. The taper will apply to individuals who have an “adjusted income” (including the value of employer pension contributions) of more than £150,000. Their annual allowance will be reduced by £1 for every £2 of adjusted income they have over £150,000 with a maximum reduction of £30,000. Individuals with a “threshold income” of less than £110,000 (excluding employer pension contributions) will not be caught by the taper.
Aligning pension input periods
To facilitate the annual allowance taper, PIPs will need to align with the tax year.
Legislation is making its way through parliament and will provide that:
- All PIPs that are open on 8 July 2015 will end on that date.
- The next pension input period runs from 9 July to 5 April 2016.
- Thereafter, all PIPs will run to 5 April in every year to run in conjunction with the tax year.
Transitional annual allowance rules for 2015/2016
HMRC has published draft technical guidance on the transitional rules applying including practical examples. This is based on the draft legislation and final updated guidance will be available after the legislation receives Royal Assent.
The 2015/2016 tax year is split into two “mini” tax years, the pre-alignment tax year (6 April to 8 July 2015) and the post alignment tax year (9 July 2015 and 5 April 2016). The PIP for any new arrangement starting after 8 July 2015 will end on 5 April 2016 and then subsequently be aligned with tax years.
To address potential calculation issues arising from the PIP changes, the amount of the annual allowance will be:
- £80,000 for PIPs ending in the pre-alignment tax year, plus any available carry-forward.
- For post alignment tax year PIPs, any unused amount of that £80,000 but capped at £40,000 plus any remaining carry-forward.
Individuals who were not a member of a registered pension scheme during the pre-alignment tax year will have an annual allowance of £40,000 for the post-alignment tax year.
The guidance states that there are no new reporting requirements for scheme administrators in connection with the transitional year.
A number of schemes are likely to have PIPs which are not already aligned with the tax year and will be affected by this change. Although the transitional arrangements are complicated, it is hoped that the short term challenges these present will ultimately lead to simplified processes in the future. Schemes will be liaising with administrators to ensure that systems are adapted to accommodate any changes and to service any increase in member queries. Schemes and employers may wish to consider the extent to which they communicate with affected members to alert them to these changes and review any existing communication materials/provisions in scheme documentation which make specific statements regarding the annual allowance and/or PIPs.