By Sarah Gosling
Whilst many IFAs and scheme administrators may be glad that pension input periods (“PIPs”) are being aligned with the tax year – the proposed transitional process to get them there may cause some serious headaches and prompt some rule amendments. It was announced in the Summer Budget that PIPs are to be aligned with the tax year from 6 April 2016. A PIP is the period over which pension savings are assessed to establish whether a tax charge (known as an “annual allowance charge”) arises. Previously, a pension plan could nominate its own PIP; many plans did this in line with their own “scheme year” to streamline administration. However, from 6 April 2016 onwards all PIPs will be aligned with the tax year. Where a PIP has been embedded in the pension plan rules it is likely that a rule amendment will be appropriate.
The proposed transitional arrangements that will apply for the 2015/16 tax year are extremely complex. Essentially, all open PIPs as at 8 July 2015 are closed with effect from that date and another PIP will then run from 9 July 2015 to 5 April 2016. In addition, the 2015/16 tax year is to be split into two mini tax years for annual allowance purposes – the first running from 6 April 2015 to 8 July 2015 (the “pre-alignment tax year”) and the second from 9 July 2015 to 5 April 2016 (the “post-alignment tax year”). Individuals will have an annual allowance of £80,000 for the pre-alignment tax year and unused annual allowance from this period can be carried across to the post-alignment tax year, subject to a cap of £40,000. Carry forward of unused annual allowance from the three previous tax years may also be utilised.
And to add insult to injury, once all that complexity has been addressed, the Government has said that it may decide to further “simplify” the rules by removing the concept of a PIP altogether!