Time is a strange construct; sometimes it seems to go ever so slowly and other times far too fast. In the world of pensions, this is further confused by the fact that a year does not always last 365 days.
Thanks to the A-Day rules a pension input period, which one might reasonably expect to last a year in line with the tax year, does no such thing. This subtlety is something that advisers must be aware of.
All a pension input period is, say the rules, is a recurring period starting from the day money is first paid into a pension after A-Day and there is a notable opportunity to reset it. This rule must be read along with the fact that clients can receive tax relief only on pension contributions up to the lower of 100% of their earnings or the annual allowance for that tax year, so long as the contributions are made in the same tax year as the earnings are paid.
The marvellous thing about pension input periods is that if the adviser asks it to be reset at the right time, a client can contribute an amount equivalent to the annual allowance for two consecutive years within a single tax year.
So, for example, a person whose pension input period runs from 6th April 2007 to 5th April 2008 could in the first instance contribute £225,000 this tax year. Let’s assume they have earned £225,000 by November this year and pay that into their pension. If they then reset their pension input period to run from 1st December 2007 to 30th November 2008, it will end in the tax year 2008/9.
Now if they continue to earn, they can pay up to a further £235,000 into their pension (the annual allowance for 2008/9). Providing they make this further contribution before 6th April 2008, it will still be eligible for tax relief in the 2007/08 tax year at their highest rate.
On the flipside, advisers should beware of the danger of using next year’s allowance this year. If a client made a contribution to their pension on 6th April 2006, their first pension input period will actually have lasted a year and a day and will have ended on 6th April 2007 – in the 2007/8 tax year. Their second pension input period will run from 7th April 2007 to 6th April 2008, ending in the 2008/9 tax year.
So any contributions made today will be counted against the 2008/9 annual allowance. Without resetting their pension input period, there is a risk that they inadvertently use up next year’s allowance prematurely without meaning to.
Advisers who have clients planning on contributing more than £225,000 this year, action must be taken to check their pension input period before a substantial opportunity is lost.
Colin Jelley is head of tax and financial planning at Skandia.
The views expressed are those of the author and not those of the company he represents.IFAonline
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