Personal PensionOct 20 2015

How to use pension input changes to maximise pots

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      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.

      The pre-alignment tax year has been given an annual allowance of £80,000, twice the normal annual allowance of £40,000.

      This is because someone could already have had a PIP (or multiple PIPs, across different pension plans) ending before 8 July, paid in their full annual allowance in that PIP, and also maxed out their contributions for the next tax year on the basis that their next PIP was scheduled to have ended after 5 April 2016.

      In other words, they might already have used up their annual allowance twice over without breaching the current rules: so, to avoid penalising them it was necessary to give them two years’ worth of annual allowance for their pre-8 July contributions.

      The post-alignment tax year has been given an annual allowance of nil, but individuals can carry forward up to £40,000 of their unused allowance from the pre-alignment tax year. This means that anyone who has not yet used up any of their annual allowance for 2015 to 2016 gets the full £40,000 to use up by 5 April 2016, but no more.

      Anyone whose first input period starts on or after 9 July 2015 (i.e. because they have not paid any pension contributions since A Day) will simply have the normal annual allowance of £40,000.

      These transitional measures do create a final opportunity for some clever planning around pension input amounts: anyone who has paid pension contributions in a PIP (or PIPs) ending between 6 April 2015 and 8 July 2015 effectively gets a new allowance of up to £40,000 to use between 9 July 2015 and 5 April 2016.

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