Personal Pension  

How to use pension input changes to maximise pots


    For example, someone could have paid £50,000 into a pension plan on 31 December 2012, closed their PIP on that date, and paid another £50,000 on 1 January 2013. The contribution paid in the first PIP would be measured against the annual allowance for the 2012 to 2013 tax year, and the second against the allowance for the 2013 to 2014 tax year.

    Together with the use of carry forward (using any unused allowance from up to three previous tax years) over the course of a couple of days someone could have contributed up to £250,000, during a tax year (in this example 2012 to 2013) with an annual allowance of just £50,000 (although less, following the reduction in the annual allowance to £40,000).

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    In practice, few had the capacity to use this approach to pay contributions on this scale, but for those with unpredictable patterns of income, this flexibility meant they could make much larger pension contributions when convenient, without losing out on their annual allowance when their earnings were lower.

    It was also a means by which those who had inadvertently exceeded the annual allowance over a tax year might avoid being penalised for their unintentional mistake.

    This also demonstrates why the government has decided to make these changes now, with a reduction in the annual allowance for additional rate taxpayers coming on 6 April 2016.

    Anyone affected by the change to the annual allowance could otherwise have used a PIP nomination to get in another year’s worth of contributions under the current system.

    Some difficult months ahead

    The second issue for advisers to negotiate is the transitional regime the government has put in place for the remainder of 2015 to 2016, in order to align all PIPs to the tax year without penalising those who had already paid sizeable pension contributions prior to the Summer Budget on 8 July 2015.

    Since some may already have had a PIP ending between 6 April 2015 and 8 July 2015, for the government to have simply ended all active PIPs on 8 July 2015 without any additional measures would have meant those individuals having two or even three years’ worth of contributions measured against the 2015 to 2016 annual allowance.

    On the other hand, to have amended all active PIP end dates to 5 April 2016 could have had a similar effect, but for some it could instead have meant stretching their current PIP out over a longer period (because their PIP was scheduled to end at some point between 9 July 2015 and 5 April 2016).

    For these reasons, in addition to ending all active PIPs on 8 July 2015, with the next due to end on 5 April 2016, the government also split the 2015 to 2016 tax year into two “mini-tax years” for the purposes of the annual allowance: the “pre-alignment” (i.e. pre-8 July) tax year and the “post-alignment” tax year.