2016 PIP changes gives two bites at the AA cherry
The move to simplify the pension input period (PIP) rules potentially gives some individuals two bites at the annual allowance (AA) cherry this tax year. Not everyone will benefit, but some individuals will have an extra AA of up to £40k to use before 6 April 2016.
From 6 April 2016, all PIPs will be aligned to the tax year. Going forward, all pension savings (both annual allowance and personal tax relief) will always be measured across the tax year. This makes it much easier for the vast majority of individuals to understand how much they can pay into their pension each year.
In order to get PIPs aligned there will be a year of transitional rules and short lived complexity. But the pain is soothed by the possibility that some individuals may be able to pay an additional £40,000 into their pension before 6 April 2016 as a result.
Here’s how the transitional PIP rules work:
- All open (pre-budget) PIPs will end on 8 July 2015 and count against the 2015/16 AA.
- A new (post-budget) 2015/16 PIP will run from 9 July 2015 to 5 April 2016.
- All PIPs are now fixed and can no longer be amended.
This means some plans could have as many as three different 2015/16 PIPs. For example:
- PIP 1 – 1 May 2014 to 30 April 2015 (the original 2015/16 PIP);
- PIP 2 – 1 May 2015 to 8 July 2015 (the original 2016/17 PIP, now a second ‘pre-budget’ 2015/16 PIP);
- PIP 3 – 9 July 2015 to 5 April 2016 (the new ‘post-budget’ 2015/16 PIP).
How does this affect the AA?
The transitional PIP rules prevent individuals who were already saving against their 2016/17 AA having two years’ pension saving counted against a single year’s AA. This clearly wouldn’t have been fair. To address this, there will be a special AA of up to £80k for 2015/16 – potentially giving some individuals an extra AA of up to £40k to use before 6 April 2016.
Here’s how the special 2015/16 transitional AA rules work:
- ‘Pre-budget’ PIPs, and other 2015/16 PIPs that ended before 9 July 2015, will have an AA of £80k
- ‘Post-budget’ PIPs will have any unused part of the ‘pre-budget’ £80k AA – up to a maximum of £40,000
In addition there will still be the opportunity to pay more than the annual allowance by making use of carry forward from earlier years. And those who have already done carry forward believing they had already maximised their 2016/17 AA and used carried forward allowances from 2013/14 may now be able go back an extra year. That’s because their 2016/17 contributions will now be tested in 2015/16 allowing them to go back as far 2012/13 to carry forward any unused part of the £50k allowance from that year.
Impact on flexi-access and DB funding
Individuals subject to the reduced £10k Defined Contribution (DC) AA, because they’ve flexibly accessed their pension savings, will also have a double allowance of £20k ‘DC’ AA for 2015/16. This mirrors the rules for those subject to the standard AA – £20k AA for their ‘pre-budget’ PIP plus the unused balance of this £20k (up to a maximum of £10k) for their ‘post-alignment’ PIP. Of course, these individuals don’t have carry forward on top.
Defined benefit schemes will have special rules to avoid having to get valuations done on 8 July 2015. The input amount for the pre and post-budget PIPs will be proportions of the total pension input amounts for all PIPs that end in 2015/16.
This effectively means anything already paid against the 2015/16 AA before 9 July 2015 is disregarded, with a ‘free’ additional 2015/16 AA of up to £40k still available for pension savings from 9 July 2015 to 5 April 2016.
So, many individuals who have already saved into their pension this year will get a second bite at the AA this tax year.
For those with the earnings, or employer funding, to support extra pension funding – who aren’t concerned about the pending LTA reduction – it may be too good an opportunity to miss. Particularly for high earning individuals facing a reduced AA (potentially as low as £10k) from 2016/17.
Source: Standard Life