Summary and implications
The Annual Allowance, which restricts an individual’s tax relief on pension contributions, has been reduced from £255,000 in the 2010/2011 tax year to £50,000 in 2011/2012. However, because of the way the legislation bites, many schemes and members may already be within the transitional period when a £50,000 limit applies. Trustees may be able to take steps to alter this (by changing the Pension Input Period (PIP)), and effectively delay the impact of the £50,000 limit. HMRC have confirmed that this may be possible, but only before the current Finance Bill receives Royal Assent.
- Trustees need to be clear on exactly when their scheme’s PIP runs from.
- If no previous PIP nomination has been made (which may mean that the scheme is already within the £50,000 period) trustees should consider making a retrospective nomination by 5 April 2011.
- Trustees must give members notice of any change to the PIP.
Annual Allowance and Pension Input Periods
Since 6 April 2006 each individual has had an Annual Allowance of pension contributions or equivalent DB accrual (known as Pension Inputs) on which he may receive tax relief. The Annual Allowance is assessed over each PIP. The amount of Annual Allowance will depend on the tax year in which the PIP ends.
The PIP for each scheme (or even for each member) may be different and it is important that trustees establish what PIP or PIPs apply to their scheme.
On page 4 there is a timeline which shows the impact of different PIPs on the Annual Allowance.
- Pension Input Periods in DB or cash balance arrangements
The first PIP will have commenced on 6 April 2006 (for active members of the scheme at that date). The scheme administrator (usually the trustee) may nominate a date as the end date for the PIP (the PIP must be no more than 12 months long).
If no nomination has been made (and the scheme was in existence on 6 April 2006) then, since 2006/2007, the PIP will have been running from 7 April to 6 April each year. The effect of this is that accrual from 7 April 2010 to 6 April 2011 will be subject to the transitional provisions. The PIP as a whole is, broadly, subject to an Annual Allowance of £255,000 for pension inputs made between 7 April 2010 and 6 April 2011 but with a limit of £50,000 for pension inputs made on or after 14 October 2010.
The difference between the 2010/2011 position and 2011/2012 is made even more stark by a change in the DB conversion factor from 10:1 to 16:1. The £255,000 Annual Allowance would allow pension accrual of £25,500 (at 10:1) whereas £50,000 (using a 16:1 factor) allows accrual of only £3,125.
Click here to view the Annual Allowance figures table.
- Pension Input Periods in DC arrangements
If no nomination has been made then the PIP will commence on the first day a contribution was paid on or after 6 April 2006 and end a year from that date. In subsequent years the PIP would run from the day immediately following the previous end date. Each new member would have his own PIP commencing on the date the first contribution was made in respect of him.
A nomination for a different PIP can be made either by a member or by the scheme administrator (usually the trustee). If more than one nomination for any period is made then only the first one will be valid. This means that unless the scheme administrator has made a nomination, the scheme may be operating with a large number of different PIPs.
Changing the Pension Input Period
If a PIP nomination has already been made then a new nomination can only be made to change the PIP for future tax years. Any nomination can only reduce a PIP, not extend it beyond 12 months. So, any nomination made now to bring forward the end of a PIP could not kick-in until the next tax year (2011/2012) when the £50,000 Annual Allowance will apply.
If no nomination has yet been made then HMRC have indicated in guidance that a nomination can be made to retrospectively change the PIP, but only if it is done in relation to the entire period since 6 April 2006. This means that trustees can make a retrospective nomination for the first PIP to end on 5 April 2007, all subsequent PIPs will then be aligned with the tax year. This facility is only available until the current Finance Bill receives Royal Assent, which will be some time this summer.
The HMRC guidance on retrospective nomination can be found here
Effects of a retrospective changes
The effect of a retrospective nomination to align the PIP with the tax year will mean that pension inputs made up to 5 April 2011 will be subject to an Annual Allowance of £255,000 (with no transitional restriction of £50,000 on inputs from 14 October 2010). The £50,000 Annual Allowance will then apply to pension inputs made on and from 6 April 2011.
A retrospective nomination will impact on individual members’ tax arrangements. The majority of members will not be affected as their pension inputs will not be at or near the Annual Allowance. In theory the change could leave members with an additional tax charge although, as essentially the shift in PIP will delay the impact of the new lower Annual Allowance, it seems most likely that the outcome will be tax neutral or even result in a repayment of tax. Claims by individuals for repayment of overpaid tax must be made within four years - this means that any claim relating to the tax year 2006/2007 (the first year in which the PIP applies) must be made before 6 April 2011. For this reason, trustees considering a retrospective nomination may wish to do so by 5 April 2011 at the latest.
Making a nomination
The only procedural requirement for making a nomination is that where it is made by the scheme administrator (trustees) the members must be given notice.
As any change in the PIP could affect an individual member’s personal tax affairs we would suggest that any notice of nomination includes a brief general explanation of how the change in PIP could impact on members’ tax arrangements. Trustees should however take care not to give members tax advice.