Attention high net worth individuals! For this tax year only, members of registered pension schemes could benefit from double the expected £40,000 annual allowance.
Pension input periods
During the summer Budget given on 8 July 2015, George Osborne announced that the pension input periods (PIPs) of all registered pension schemes would, from 6 April 2016, be aligned with the tax year. A PIP is the period over which the value of pension savings is measured for the purpose of calculating a registered pension scheme member’s annual allowance.
Many such schemes already had PIPs which were aligned with the tax year, but the PIPs of others were not, for example because they were aligned with an accounting year for ease of administration.
To achieve alignment, all PIPs which were open as at 8 July were closed immediately. A further PIP in respect of all registered schemes will run from that date until 5 April 2016 and thereafter PIPs will run from 6 April in one year to 5 April in the next, in line with the tax year.
Inadvertent tax charges
Transitional rules have been introduced to avoid scheme members being subjected to an unexpected annual allowance charge. Members who thought their PIP was going to end during the tax year 2016/17 may have made pension savings of more than £40,000, on the basis that their savings would have been tested against the annual allowance for the tax years 2015/16 and 2016/17. Following the change to PIPs, those savings will now only be tested against the annual allowance for the tax year 2015/16. Without the transitional relief, that annual allowance figure would only have been £40,000, resulting in an annual allowance charge for such members.
To avoid this problem occurring, the transitional rules will provide that members will have an annual allowance of £80,000 (plus any unused annual allowance carried forward from the three previous tax years) in respect of pension savings made in all PIPs ending on or after 6 April 2015 and on or before 8 July 2015. Savings made during the PIP which runs from 9 July 2015 to 5 April 2016 will have a nil annual allowance, but up to £40,000 of any unused annual allowance from the previous PIP can be carried forward (plus, again, any unused annual allowance from the three tax years ending in 2014/15).
Increased pension saving
The purpose of the transitional rules is clear, but a by-product is that registered scheme members have the opportunity to make higher than usual pension savings without being made subject to an annual allowance charge.
Not all good news for high earners
However pension saving prospects for high earners aren’t all rosy – from 6 April 2016, a tapered annual allowance will apply to pension savings. For those whose adjusted income (broadly, taxable income from all sources) exceeds £210,000, the annual allowance will be £10,000. Those whose income is lower will enjoy a higher annual allowance, with anyone whose taxable income is below £110,000 having an annual allowance of £40,000. Remember though that the amount of the annual allowance may be decreased further if a member takes advantage of the new pensions flexibilities which were introduced in the March 2014 Budget.
So going back to the increased annual allowance which will apply this year, high earners should probably take advice from their financial advisers about making hay while the sun shines, because the sun won’t shine for long.