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Transitional rules for DB schemes (pre 6 April 2016)
July 2015 Budget – aligning pension input periods for DB schemes
This note should be read in conjunction with our article on Transitional rules for DC schemes which provides more detail and examples of pre and post alignment tax years.
Key facts
- All pension input periods open on 8 July 2015 automatically ended on 8 July 2015.
- The next PIP for everybody ran from 9 July 2015 to 5 April 2016. Since 6 April 2016 all PIPs are aligned with the tax year, so they run from 6 April to 5 April each year.
- It was possible that existing plans could have two or three PIPs ending in the tax year 2015/16.
- Individuals had a pre-alignment tax year annual allowance of £80,000.
The combined period
The total period from the start of the pension input period open on 8 July 2015 to 5 April 2016 was called the combined period. This was then split into the pre and post alignment tax years:
- the pre alignment tax year - start of the original pension input period to the 8 July 2015,
- the post alignment tax year - from 9 July 2015 to 5 April 2016.
The pension input amounts for the pre and post alignment tax years were a proportion of the pension input amount calculated as if all the pension input amounts for pension input periods ending in the tax year 2015/16 had been made in the combined period. The proportion was based on the number of days in the pre or post alignment periods and the number of days in the combined period.
The pension input amount for the post alignment tax year was the pension input amount for the combined period (call this PIACP) multiplied by the number of days in the post alignment tax year divided by the number of days in the combined period.
Case study 1 - Peter
Peter was a member of a DB scheme with a pension input period running from 1 January to 31 December until the Budget announcement.
The open pension input period on 8 July 2015 was running from 1 January 2015 to 31 December 2015 and the combined period is 1 January 2015 to 5 April 2016. The number of days in the combined period was 461(1 January 2015 – 5 April 2016) and the number of days in the post alignment tax year was 272 (9 July 2015 – 5 April 2016).
If his PIACP was £45,000, the pension input amount for the post alignment period was £45,000 x 272/461 = £26,551.
For the pre-alignment period, his pension input amount was £45,000 x 189/461 = £18,449.
Calculating PIACP
The PIACP was calculated using the same method as before. The value of the accrued pension at the beginning of the pension input period was deducted from the value of the accrued pension at 5 April 2016.
However, as the combined period was at least 12 months, the accrued pension value at the beginning of the combined period was updated by 2.5% rather than the CPI increase for September 2014 (which was 1.2%).
HMRC Pensions Tax Manual - PTM058070: Transitional rules for tax year: PIA
Case study 2 - Chloe
- Chloe is a member of a DB scheme with a pension input period of 1 January to 31 December.
- The accrual rate is 1/60th.
- Her pensionable pay on 31 December 2014 was £110,000.
- On 31 December 2014 she had completed 20 years pensionable service (pensionable service in the scheme is in complete years).
- Her pensionable pay on 5 April 2016 was £120,000.
- On 5 April 2016 she had completed 21 years pensionable service.
- She had no carry forward available.
Her opening value was therefore 16 x £110,000 x 20/60 = £586,667. Uprating this by 2.5% gives a value of £601,334 (£586,667 x 1.025).
Her closing value was 16 x £120,000 x 21/60 = £672,000.
Her PIACP was therefore £672,000 - £601,334 = £70,666.
Her pension input amount for the post alignment period was £70,666 x 272/461 = £41,694.
Her pension input amount for the pre alignment period was £70,666 x 189/461 = £28,972.
As Chloe's pension input amount for the pre alignment period was £28,972, she could have carried forward £40,000 (£80,000 - £28,972 = £51,028, as the cap of £40,000 applied) to the post alignment period.
As Chloe's pension input amount for the post alignment period was £41,694, she will have had an annual allowance charge on the £1,694 excess over the £40,000 annual allowance.
Becoming a deferred member during the combined period
There were special rules where a member became a deferred member during the combined period but if the changes hadn't taken place there would have been a pension input period that ended after 8 July 2015 but before 5 April 2016.
In those circumstances, the member was treated as being a deferred member from the date the last pension input period in which they were an active member would have ended and the proportion for the post alignment period shortened accordingly. That ensured that scheme administrators didn't have to carry out a valuation of pension savings for the deferred member at 5 April 2016.
The normal time apportionment of the pension input amount was adjusted where the member becomes a deferred member during the combined pension input period.
If the original pension input period in which the member became a deferred member ended before 9 July 2015, the apportionment of the pension input amount was 100% to the pre alignment period and nil to the post alignment period.
If the original pension input period in which the member became a deferred member ended on or after 9 July 2015, the apportionment for the post alignment period was the number of days from 9 July 2015 to the end date of the original pension input period divided by the number of days in the original pension input period.
Case study 3 - Lily
Lily's pension scheme had an original pension input period running from 1 August 2014 to 31 July 2015.
If Lily became a deferred member on 31 July 2015, the post alignment period would have run from 9 July 2015 to 31 July 2015, not to 5 April 2016.
The pension input amount for her combined period was based on the period 1 August 2014 to 31 July 2015.
So if her PIACP was £60,000 (based on an end date of 31 July 2015), the split is:
- post alignment period = £60,000 x 23/365 = £3,781. 23 was the number of days from 9 July 2015 to 31 July 2015 and 365 was the number of days in the original pension input period.
- pre alignment period = £60,000 x 342/365 = £56,219. 342 was the number of days from 1 August 2014 to 8 July 2015.
Disclaimer
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.