The government has decided to align all pension input periods to the tax year, in order to support the tapering of the annual allowance for additional rate taxpayers from 6 April 2016.
This pension input period change will make the job of working out how much someone can contribute to their pension plan a good deal easier, but not before negotiating some fairly tricky transitional measures in the run up to the tax year end.
For some, the transition to the new system will also provide an opportunity to make a one-off increase in their contributions.
PIPs before the Summer Budget
Working out how much someone has contributed to a registered pension scheme, in order to measure their contributions against the annual allowance for a given tax year, is not simply a matter of adding up all of their contributions between 6 April and the following 5 April.
Instead, you need to total up all the pension contributions paid in each pension input period (PIP) ending in that tax year.
Under a defined contribution arrangement, the first PIP starts when the first contribution is paid into the individual’s pension plan, and used to end by default on the following 5 April.
The next PIP starts on the day after, then ends on the following 5 April, and so on. By default, PIPs under new pension arrangements (those set up since 6 April 2011) are therefore already aligned with the tax year.
The complexity comes in partly because of the pre-April 2011 default, which meant that the first PIP under a defined contribution arrangement started on the date of the first contribution following A Day, 6 April 2006, and ended on the anniversary of that date.
For example, if the first contribution under an arrangement was paid on 1 June 2009, the first PIP would have lasted from 1 June 2009 to 1 June 2010.
The next PIP would start on 2 June 2010 and end on 1 June 2011, and so on.
In this example, a contribution paid on 1 June 2010 would be measured against an individual’s annual allowance for the 2010 to 2011 tax year.
A contribution paid just one day later, on 2 June 2010, would be measured against the annual allowance for 2011 to 2012, because it would fall in the PIP ending on 1 June 2011.
To add to the complexity, both the administrator of a pension scheme and the pension plan member could nominate to change the date a PIP ended (in a defined benefit scheme, just the scheme administrator could do this).
There were some restrictions: only one input period per pension arrangement could end in each tax year, for example, and since July 2011 nominations could not be retrospective (that is, the nominated end date could not be before the date the nomination was made).
The price of simplicity
So why not an unqualified sigh of relief from all concerned that the government has decided to do away with all this complexity, and align all PIPs to the tax year?
For one, even though providers, advisers and members will probably benefit more in the long term from this simpler approach, the sort of flexibility that changing the end date of a PIP provided was a useful financial planning tool for those who wanted to maximise their pension contributions over a given time period.