Understanding how pension input periods work will enable advisers to ensure their clients can take full advantage of the carry forward allowance of tax relief on pension contributions, writes Fraser Grant, director of The Advice Lab.
Timing has never been more important for pension contributions than it is today. It has always been an issue for pension contributions if tax relief was to be claimed and now relief can also be clawed back, it is even more important.
By trying to ensure pension tax relief remains ‘fair and sustainable’, and at the same time protect public finances, the government has reduced the annual allowance for some pension input periods (PIPs) ending in the 2011/12 tax year to £50,000.
The 2011/12 tax year will require reviews on behalf of two groups of individuals: those who were restricted by the anti-forestalling provisions and those who were not.
Calculating pension input
Ignoring exemptions, what is the maximum pension input amount for PIPs ending in the 2011/12 tax year that would not create an annual allowance charge:
Advisers could be forgiven for thinking the maximum pension input amount is (b) £200,000. This figure is based on the assumption that the pension scheme member is eligible for the maximum carry forward of unused annual allowance. However, it is important to be careful with carry forward because if the client has never been a member of a registered pension scheme, carry forward is not available.
The correct answer is (d) £255,000. Any PIP that started prior to 14 October 2010 and ends in the 2011/12 tax year will have an annual allowance of £255,000. No annual allowance charge will apply, provided the pension input amount from 14 October 2010 to the end of the PIP does not exceed the new annual allowance threshold and the total amount for the period does not exceed £255,000.
This would typically produce a split in the pension input amount of £50,000 for post-13 October 2010 and £205,000 for pre-14 October 2011. If carry forward is available then, based on the maximum carry forward of £150,000, it is possible for the pension input amount to be split into £200,000 for post-13 October 2011 and £55,000 for pre-14 October 2010 and not incur an annual allowance charge.
The PIP date is key
Knowing the PIP date is critical in determining the pension input amount and the tax year against which it will be set. It is also critical when considering carry forward.
It is possible to change the PIP end date, but the rules introduced for the 2011/12 tax year are not as flexible as the previous rules so it is important not to use them as a reliable guide.
Do not forget
New arrangements established after 5 April 2011 will have a default PIP end date, for example, 5 April in the tax year in which the first contribution to the arrangement is paid.
Changing the PIP end date can only be made to a future date and must be after the date of nomination. Backdating is not possible.
- Where the change being made is during the first PIP, the date can be either earlier or later than the default date but must be before the date of the anniversary of the arrangement. For any other subsequent PIP, a new date must be earlier than the default date and must be in the same tax
year in which the default date falls.