PIP PIP hooray!

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As a consequence of the introduction of the tapered annual allowance rules from 6 April 2016, the government intend to align all pension input periods (PIPs) with tax years. This change was announced in the Summer Budget Statement of 8 July 2015 and this article looks at how the change will be introduced and the implications it will bring.

Although the tapered annual allowance rules will only potentially affect a small number of individuals, the changes to the PIP rules will affect many more people particularly in the 2015/16 tax year, which will be classed as a transitional year.

This article is based on our understanding of the information contained in HM Revenue & Custom’s (HMRC) technical note dated 8 July 2015.

What is a PIP?

It’s a period of time, usually 12 months, which is used to measure the benefits accrued or contributions paid by or on behalf of a member against the annual allowance (and money purchase annual allowance if an individual has flexibly accessed any of their pension benefits since 6 April 2015). Any benefits accrued or contributions paid in a PIP are counted towards the pension input amount for the PIP.

Prior to 8 July 2015, a pension arrangement could only have one PIP ending in a tax year. In practice, Aegon had customers with pension arrangements where the PIP ran in line with tax years and also where the PIP ran in line with some other period. For example, a PIP may have run from 6 April to 5 April, 1 January to 31 December or 1 June to 31 May. The end date of the PIP determines the tax year the contributions made in the PIP are counted against. So, a PIP ending on 10 April 2014 would have counted towards the annual allowance for the 2014/15 tax year. 

What is changing?

It was announced in the Summer Budget Statement of 8 July 2015 that there was to be an immediate change to the PIP rules. In summary, this means that:

  • For existing arrangements, all PIPs that were open on 8 July 2015 were immediately closed on that date. The next PIP will run from 9 July 2015 and will end on 5 April 2016. PIPs will then run in line with tax years from 6 April 2016 onwards.
  • Any new arrangements that will have their first PIP starting on or after 9 July 2015 and before 6 April 2016, will see that PIP end on 5 April 2016. PIPs will then run in line with tax years from 6 April 2016 onwards.
  • Any new arrangements that will have their first PIP starting in the 2016/17 tax year will see that PIP end on 5 April 2017. PIPs will then run in line with tax years from 6 April 2017 onwards. 
  • It will not now be possible for an individual or a scheme administrator to vary the end date of a PIP. 

The immediate change to the PIP rules means that all existing arrangements on 8 July 2015 will have two or three PIPs for the 2015/16 tax year. In other words, for the 2015/16 tax year only, it will be possible to have multiple PIPs for the same arrangement ending in the same tax year. Here are some examples to illustrate this:

1)       An arrangement had a PIP running from 1 May to 30 April each year.

Old PIP rules New PIP rules
1 May 2014 to 30 April 2015

1 May 2015 to 30 April 2016

1 May 2016 to 30 April 2017 and so on
1 May 2014 to 30 April 2015

1 May 2015 to 8 July 2015

9 July 2015 to 5 April 2016

6 April 2016 to 5 April 2017 and so on

2)       An arrangement had a PIP running from 6 April to 5 April each year.

Old PIP rules New PIP rules
6 April 2015 to 5 April 2016

6 April 2016 to 5 April 2017 and so on
6 April 2015 to 8 July 2015

9 July 2015 to 5 April 2016

6 April 2016 to 5 April 2017 and so on

Essentially, the 2015/16 tax year will be split into two mini tax years for the purpose of testing against the annual allowance.

‘Mini tax year 1’ ends on 8 July 2015 and HMRC refer to this as the ‘pre-alignment tax year’. This covers savings made to PIPs that end on or between 6 April 2015 and 8 July 2015.

‘Mini tax year 2’ runs from 9 July 2015 to 5 April 2016 and HMRC refer to this as the ‘post-alignment tax year’. This covers savings made to PIPs that will end on 5 April 2016. 

Mini tax year 1 For savings made to PIPs that end on or between 6 April 2015 and 8 July 2015. £80,000 plus any carry forward from tax years 2012/13, 2013/14 and 2014/15.
Mini tax year 2 For savings made to PIPs that will end on 5 April 2016. Where an individual was a member of a registered pension scheme in the period covered by mini tax year 1, a maximum of £40,000 of any unused annual allowance from ‘mini tax year 1’ can be carried forward into ‘mini tax year 2’.

Where an individual has pension savings in PIPs ending in mini tax year 2, but was not a member of a registered pension scheme at any time in the period 6 April 2015 to 8 July 2015, then there will be an annual allowance for ‘mini tax year 2’ of £40,000.

In both scenarios, any remaining carry forward from tax years 2012/13, 2013/14 and 2014/15 can also be used. For mini tax year 2, this is on the proviso that any carry forward amounts haven’t already been used up in mini tax year 1.

For any PIPs ending in the period from 6 April 2015 to 8 July 2015, there will be an £80,000 annual allowance. The annual allowance for the period from 9 July 2015 to 5 April 2016 is nil but up to £40,000 of any unused annual allowance from the period up to 8 July 2015 can be added to this. Here’s some examples:

Contributions paid for PIPs ending in the period from 6 April 2015 to 8 July 2015 inclusive Contributions that could be paid from 9 July 2015 to 5 April 2016 inclusive without a charge applying Total possible contributions free from the annual allowance charge for 2015/16
£80,000 £0 £80,000
£61,000 £19,000 £80,000
£40,000 £40,000 £80,000
£17,000 £40,000 £57,000
£0 £40,000 £40,000

These examples do not include any use of carry forward amounts that may be available from tax years 2012/13, 2013/14 and 2014/15 and also assume that the money purchase annual allowance restriction does not apply. 

If someone set up a new pension arrangement in the period 9 July 2015 to 5 April 2016 but was not a member of a registered pension scheme at any time in the period from 6 April 2015 to 8 July 2015, then that individual will have a £40,000 annual allowance for the period from 9 July 2015 to 5 April 2016.

Carry forward will continue to be available so any unused annual allowance from the previous three tax years can be carried forward to the current year. The only exception is that there will be special rules for the 2015/16 tax year where this is a carry forward year. Effectively, carry forward will be available in line with the following:

Current tax year Carry forward years and maximum amounts
Mini tax year 2 (providing the carry forward amounts haven’t already been used up in mini tax year 1). 2012/13 (£50,000), 2013/14 (£50,000), 2014/15 (£40,000) and mini tax year 1 (£40,000).
2016/17 2013/14 (£50,000), 2014/15 (£40,000) and mini tax year 1 (£40,000).
2017/18 2014/15 (£40,000), mini tax year 1 (£40,000) and 2016/17 (£40,000).
2018/19 Mini tax year 1 (£40,000), 2016/17 (£40,000) and 2017/18 (£40,000).

These examples assume that the taper provisions do not apply.

Similar rules will also apply to anyone who is subject to the money purchase annual allowance (MPAA) through having flexibly accessed pension benefits from 6 April 2015 onwards.

If the flexible access took place in mini tax year 1, then the MPAA for savings made in the period from 6 April 2015 to 8 July 2015 is £20,000 and the alternative annual allowance (for savings to defined benefit schemes) for the same period is £60,000. For mini tax year 2, the MPAA limit for savings made in the period from 9 July 2015 to 5 April 2016 is a maximum of £10,000 of any unused annual allowance carried forward from mini tax year 1. The limit for the alternative annual allowance is a maximum of £30,000 of any unused annual allowance carried forward from mini tax year 1.

If flexible access of benefits took place in mini tax year 2, then the MPAA for savings made in the period from 9 July 2015 to 5 April 2016 is £10,000 and the alternative annual allowance limit for the same period will be up to £30,000.

As there are two mini tax years for the 2015/16 tax year, there will be two different pension input amounts for each one.  For money purchase arrangements, the pension input amount for mini tax year 1 will be the total of all the contributions paid to PIPs ending in the period from 6 April 2015 to 8 July 2015 inclusive. For mini tax year 2, it will be the total of the contributions paid in the period running from 9 July 2015 to 5 April 2016 inclusive.

For defined benefit arrangements, one total pension input amount will be calculated for all PIPs ending in the 2015/16 tax year. The pension input amounts for each mini tax year will then be a proportion of the total amount. HMRC’s technical note contains examples showing how this works, including examples of what happens when someone leaves service and becomes a deferred member. 

An annual allowance charge could arise from either mini tax year 1 or mini tax year 2. If a charge arises for both mini tax years, then these should not be reported separately. Any charge that arises for the 2015/16 tax year should be reported by an individual in their 2015/16 self-assessment tax return as normal.

There are no new reporting requirements for scheme administrators even though the 2015/16 tax year is being treated as a transitional year.  So, pension savings statements will need to be provided where required to scheme members on or before 6 October 2016 for the 2015/16 tax year. Scheme administrators will need to be able to split the contributions for the 2015/16 tax year into the various different PIPs that apply for each scheme member. 

What next for PIPs?

HMRC have also said that they will consider at a later stage whether they can further simplify the rules by removing the concept of a PIP altogether. So, it’s a case of ‘toodle pip’ for now but watch this space for if and when there are more changes…

Pensions Technical Services