Neil MacGillivray highlights the importance of checking pension input periods
The reduction in annual allowance (AA) from £50,000 to £40,000 with effect from 6 April 2014 means care needs to be taken with pension savings made in the 2013/14 tax year to identify the end date of the pension input period (PIP) into which they fall. Savings made in PIPs ending in the 2014/15 tax year will be tested against the reduced AA of £40,000.
For example: Consider a SIPP arrangement where the PIP runs from 1 June to 31 May. Contributions made by the member on or after 1 June 2013 will fall in the PIP ending 31 May 2014 and therefore will be tested against the £40,000 limit.
If this is the only pension arrangement held by the member and if contributions over the period exceeded £40,000 the member would need to have sufficient unused AA from the three previous tax years to avoid an AA charge. The earliest year that unused AA could be accessed from, given that the carry forward will be to the 2014/15 tax year, is 2011/12.
If it is assumed that the first contribution to the SIPP was made on 31 May 2009 and the contribution history resulted in the following pension input amounts:
2013/14: £50,000 (estimate)
2014/15: £50,000 (estimate)
The member wants to maintain the current funding level so that the pension input amounts for 2013/14 and 2014/15 will be £50,000. Doing this the member will have an AA charge to account for in respect of 2014/15 by virtue of the £10,000 excess. There is no unused AA from the three previous tax years to offset this excess. What to do?
Utilising unused AA
Finding a way to utilise the unused AA from 2010/11 would offer a solution.
If the member realises they have a problem before 31 May 2013 and has the resource and time, they could increase the funding in the 2013/14 PIP to £80,000; no AA charge would apply for that tax year because the unused AA of £30,000 from 2010/11 offsets the excess.
Thereafter, reducing funding in the 2014/15 PIP to £20,000 means that the overall funding up to 31 May 2014 will remain the same i.e. £100,000 in total over 2013/14 and 2014/15. However there is no AA charge to account for, and in addition there will be unused AA of £20,000 in respect of 2014/15.
If the member is unable to do anything before 31 May 2013 all is not lost. An alternative strategy would be to set up a new arrangement and redirect some of the contributions destined for the existing SIPP, post 31 May 2013, to the new arrangement.
For example if the first contribution is made to the new arrangement on 1 August 2013, by default the first PIP would end 5 April 2014 i.e. in the 2013/14 tax year. A contribution of £30,000 to the new arrangement before 6 April 2014 would use up the unused AA available from 2010/11 and to maintain the same level of funding £20,000 could be made to the original SIPP before 31 May 2014.
The end result is the same as in the preceding paragraph. Setting up a new arrangement is likely to introduce another set of charges. However, this might be a price worth paying if the goal is to maintain the funding level while avoiding an AA charge.
Legislation is such that in the case of a defined benefit (DB) arrangement the member is unable to make a nomination in respect of a PIP.
Under such arrangements the power rests solely with the scheme administrator meaning that PIP nominations are likely to be made at scheme rather than member level. Therefore the scope for dealing with the situation as outlined in the above example is somewhat diminished.
In general, it is advisable for active members of DB arrangements who are making healthy pension provision to check to see if the reduction in the AA is going to cause them problems.
Take the example of a 60ths final salary scheme and assume the relevant CPI figure is 3%:
Closing value = £126,000 (pensionable earnings) x 17/60 x 16 = £571,200
Opening value = £120,000 (pensionable earnings) x 16/60 x 1.03 (CPI uprating) x 16 = £527,360
Pension input amount = £571,200 – £527,360 = £43,840
Therefore the reduction in the AA to £40,000 from 6 April 2014 could catch out the unwary. Knowing PIP end dates and the rules surrounding PIP manipulation could, as highlighted above, prove to be useful in preserving tax efficient pension saving.
Neil MacGillivray is head of technical support at James Hay Partnership
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