It will come as no surprise to hear me describe pensions as complicated. But even within these layers of complexity the intricacy involved with pension input periods are a whole different level: a real geek’s paradise.
With this in mind, the Government’s decision to align input periods to tax years from April 2016 onwards has been greeted by grateful nods of appreciation by many, despite the change removing a valuable tax planning tool.
The input period is the phase of time used to measure the contributions paid (or benefits built up in a defined benefit scheme) against the annual allowance. The one overriding rule was that only one input period could end in a tax year (for each arrangement).
Some clients will be blissfully unaware of input periods, not realising they can vary for different arrangements and can be changed if desired. In truth, they are irrelevant for many people. However, others, especially owner-directors, manipulate them to allow payments to be made close together within the same accounting period.
The Government’s summer Budget decision to align input periods with tax years from April gives many individuals an opportunity to pay more than the annual allowance in 2015/16. All input periods open on 8 July 2015 will end on that day. The next input period for these arrangements will be 9 July 2015 to 5 April 2016.
This means all existing pension arrangements on 8 July will have two or three input periods ending in this tax year.
Some people may have used input periods to make pension savings of up to £80,000 prior to the Budget, in the expectation these savings would be tested against the annual allowance for tax years 2015/16 and 2016/17.
So the Government is introducing transitional rules to ensure people who made significant savings before the summer Budget are protected from an annual allowance charge. Under the new rules, people then have an allowance of up to £40,000 for post-Budget savings (plus any remaining carry forward from the three previous tax years).
However, savings made between April and 8 July in excess of £40,000 will reduce this new allowance.
There is a further complication for those who have flexibly accessed their retirement savings since April 2015. These people are limited by the money purchase annual allowance which means they can only pay in up to £10,000 between 8 July and the end of the tax year.
In simple terms – if input periods can ever be simple – most people who paid up to £40,000 into a pension scheme between 6 April and 8 July now have an opportunity to pay a further £40,000 before April 2016. Those who paid more than £40,000 pre-Budget can pay the balance, if any, up to £80,000.
Given the ongoing discussions around the removal of higher rate tax relief, or pension tax relief altogether, those who can afford to make this payment may well wish to do so while tax relief remains available.
Andrew Tully is pensions technical director at Retirement Advantage