PENSION INPUT PERIODS – THE CHANGES – Q&A DOCUMENT

BACKGROUNDAs part of the Budget announcements HM Revenue and Customs introduced changes to align pension input periods with tax years from the end of the current tax year.

Transitional arrangements came into effect from 8 July 2015 aimed at:(a) achieving the overall objective of aligning pension input periods for all schemes to tax year ends by

April 2016 and(b) protecting any pre-Budget pension savings from retrospective tax charges.

HOW WILL THE TRANSITIONAL ARRANGEMENTS WORK FOR EXISTING CLIENTS?

Pension input periods that were open as at 8 July 2015

This period is automatically closed as at 8 July 2015.

HOW WILL THE NEXT INPUT PERIOD RUN?

The next pension input period will run from the 9 July 2015 to 5 April 2016.

DOES THIS MEAN THAT CLIENTS WILL HAVE MORE THAN ONE PENSION INPUT PERIOD THAT ENDS IN THE SAME TAX YEAR?

Yes – clients will have two, or possibly three input periods that end in the same tax year, the latter being where :

• an input period started on or before the 6 April 2015 but to fund the 2015/16 annual allowance plus carry forward, it ended no later than 8 July 2015

• a second input period was started before 8 July 2015 to fund the £40,000 annual allowance for 2016/17 – this also terminates on 8 July 2015 ( known as the pre-alignment tax year)

• a new input period will now commence from the 9 July 2015 and end 5 April 2016.

WHAT ABOUT NEW CRA/PP6 PLANS SET UP FROM 9 JULY 2015?

For new CRA/ PP6 arrangements set up from 9 July 2015 where a contribution is paid, or for existing CRA and heritage pension contracts where the first contribution since 6 April 2006 is paid on or after 9 July 2015, the initial pension input will start from the date of the first contribution and will automatically end on 5 April 2016.

This process now automatically applies to any new CRA/ PP6

WILL CLIENTS BE ABLE TO TERMINATE INPUT PERIODS EARLY IN FUTURE?

No – from 6 April 2016 ALL input periods for all existing arrangements will run run 6 April 2016 to 5 April 2017 and all subsequent periods will run from start to end of tax year. It will not be possible to vary the input period. It is also not possible to terminate any input period that started on or after 9 July 2015 before the end of the 2015/16 tax year.

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TRANSITIONAL ARRANGEMENTS

HOW DO THE TRANSITIONAL ARRANGEMENTS WORK?

There are two basic principles. • Clients will have a total annual allowance for 2015/16 of £80,000 + any carry forward of unused

allowances for all pension input periods ending between 6/4/2015 and 8/7/2015. • In terms of post-Budget funding (i.e. into the input period that starts 9 July 2015 and will end 5 April 2016)

clients will have a nil annual allowance for that period but have an unused annual allowance of up to £40,000 from the period up to 8 July 2015, plus any carry forward of remaining unused allowances.

You can find further information on these changes on our Knowledge Direct site: • https://www.informerdigital.com/PortalClient/en/Knowledge-Direct/Pensions/2015-reforms/money-

purchase-annual-allowance/

HOW CAN YOU CALCULATE THE ALLOWANCES FOR INDIVIDUAL CLIENTS?

We have a calculator to enable you to make the calculations. It is housed on the Knowledge Direct site and can be downloaded by financial advisers. A copy of the link and the download is below.

www.informerdigital.com/PortalClient/en/Knowledge-Direct/Pensions/Annual-Allowance/Helping-you-calculate-Carry-Forward/

ARE THERE ANY SPECIFIC ADDITIONAL CONSIDERATIONS THAT NEED TO BE TAKEN INTO ACCOUNT WITH THESE CHANGES?

Although these changes may potentially allow individual clients to fund higher levels of contributions in the remainder of this tax year, any personal funding is limited to no more than 100% of their relevant earnings in this tax year.

Funding by an employer does not have the same limitations, although the tax relief on any employer contribution is subject to assessment by the employer’s Local Inspector of Taxes.

These limitations have always applied for pension scheme funding, so nothing has changed in that respect.

DO THE CHANGES AFFECT THE MONEY PURCHASE ANNUAL ALLOWANCE FOR THOSE INDIVIDUALS IN FLEXI-ACCESS DRAWDOWN?

Yes, the same principles apply with the total MPAA for 2015/16 being £20,000 with an MPAA ceiling for input periods starting 9 July 2015 onwards being £10,000.

The total alternative annual allowance for accruals from defined benefit/ cash balance schemes in the periods will be £60,000 and £30,000 respectively.

WILL THESE CHANGES AFFECT FINAL SALARY AND CASH BALANCE SCHEME ACCRUALS?

Yes, all schemes are affected. The way in which the calculations will be made however differs in order to ease the administrative burden on scheme administrators, and the overall calculation period will be at least 12 months. Those scheme providers would need to be contacted to obtain relevant information of the value of any annual allowance built up in those schemes.

APPENDIX OF ADDITIONAL EDUCATIONAL INFORMATIONHOW DOES THIS WORK IN PRACTICE?

Example 1 Ian has savings of £61,000 for pension inputs before 9 July 2015. He wants to pay a further contribution of £12,000 after 9 July but is worried that this might subject him to an annual allowance tax charge.

The contribution that Ian wants to pay won’t subject him to an annual allowance tax charge as:• his total pension savings are less than £80,000 and• his post-Budget savings will be less than £40,000.

NOTE: BUSINESS OPPORTUNITY• Ian could actually pay a maximum of £19,000 plus any carry forward of unused relief from input periods ending

2012/13,2013/14 and 2014/15 as £61,000 deducted from the overall £80,000 annual allowance for the 2015/16 tax year leaves £19,000 available to pay no later than 5 April 2016.

• None of the £61,000 paid before the 9 July is applied to use up available unused carry forward relief so in effect the change in rules has provided Ian with an additional £40K annual allowance.

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Example 2 Leonara has pension savings of £17,000 that have been made in two pension input periods ending 31 May 2015 and 8 July 2015. She wants to know what additional funding can be made in the rest of the current tax year.

Answer Leanora’s available funding in the input period that will start from the 9 July 2015 and end 5 April 2016 will be £40,000 plus any unused carry forward allowances from the 2012/13, 2013/14 and 2014/15 tax years.

Under the transitional rules £17,000 would be deducted from the combined £80,000 overall annual allowance leaving £63,000 potentially available which is limited to the £40,000 ceiling for the input period 9 July 2015-5 April 2015.

NOTE: BUSINESS OPPORTUNITY• The new rules give Leonora additional funding scope this year of £17,000 • Leanora still has a full annual allowance available of £40,000 for the 2016/17 tax year, although contributions

for that can’t be paid until 6 April 2016 at the earliest.

HOW IS THE ANNUAL ALLOWANCE CALCULATED FOR FINAL SALARY SCHEMES?

The basic process to follow is:

Step 1 Determine the overall input amount of the input periods for the combined period from the start of the original

input period and ending 5 April 2016. The individual’s rights at the start period will be uprated by 2.5% NOT 1.4% that represents the CPI increase at September 2014

Step 2 Having determined the overall pension input value, calculate the value for the period 9 July 2015 to 6 April

2016 by taking the total value and applying a factor of:

272 =- number of days from 9/7/2015 to 5/4/2016/ D= total number of days of combined pension input

Step3

Step2 determines the value of the post-alignment period. The difference between this and the total value provides the value for pre-alignment tax year purposes.

NOTE: BUSINESS OPPORTUNITY• For any individual where contributions have been paid in this tax year prior to 9 July 2015 of less than £40K in

an input period that was scheduled to end in this tax year, an additional annual allowance of £40,000 can be funded before the end of the tax year with full relief.

• For any individual where contributions have been paid in this tax year prior to 9 July 2015 of between £40,000 and £80,000 in an input period that was scheduled to end in this tax year (which would originally have included using some carry forward of unused annual allowance) an additional annual allowance of £40,000 has effectively been created, which can be paid before the end of the tax year with full relief.

• Similar additional funding opportunities apply at reduced levels for those individuals who have funded contributions since 6 April 2015 under the Money Purchase Annual Allowance thresholds.

• Potential scope for additional money purchase funding may be created where the client is accruing benefits under separate defined benefit or cash balance schemes, due to the more generous uprating factor applied to the opening balance value to determine the annual allowance applicable.

• For any individual funding the 2016/17 annual allowance through a pension input period that was originally scheduled to end in the 2016/17 tax year, an additional £40,000 annual allowance is now available, although the contributions can’t be made until 6 April 2016 at earliest.

SK11851/215-1091/August 2015

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Old Mutual Wealth is the trading name of Old Mutual Wealth Limited which provides an Individual Savings Account (ISA) and Collective Investment Account (CIA) and Old Mutual Wealth Life & Pensions Limited which provides a Collective Retirement Account (CRA) and Collective Investment Bond (CIB). Old Mutual Wealth Limited and Old Mutual Wealth Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively.

Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom.

Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Old Mutual Wealth Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59.

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