To accommodate the alignment and to calculate the maximum annual allowance any PIP brought to a close on 8 July is deemed the pre-alignment tax year. This period has in effect an £80,000 annual allowance, and accommodates those who had intended for some inputs during this period to be used against the 2016/17 tax year. The period from 9 July 2015 to 5 April 2016, deemed the post-alignment tax year, effectively has no annual allowance but can use up to £40,000 annual allowance from the pre-alignment tax year if that period’s inputs have not been fully used.
The situation can be better explained using the examples below:
1. No contributions in any PIPs closed in the period 5 April to 8 July
The individual will have an annual allowance in the post-alignment PIP of £40,000. This is the limit that can be carried forward from the pre-alignment PIP.
2. Contribution of £40,000 in PIPs closed in the period 5 April to 8 July
The individual will have an annual allowance in the post-alignment PIP of £40,000. This is because the pre-alignment PIP had a total annual allowance of £80,000 of which only £40,000 has been used and up to £40,000 can be carried forward to the post-alignment PIP.
3. Contribution of £20,000 in PIPs closed in the period 5 April to 8 July
The individual would have an annual allowance in the post-alignment PIP of £40,000 being the carry forward from the pre alignment period restricted to the maximum carry forward of £40,000.
We have so far only looked at defined contribution/money purchase plans. The situation can be more complex still if the individual is also a member of a defined benefit arrangement, since the employer contribution to these types of scheme is often not readily available and quantified in pounds and pence. Obtaining this information might also take some time, and this could be problematic if calculations are necessary to implement a contribution at short notice ahead, for example, of a tax year end.
As has been demonstrated, each individual’s personal circumstances must be taken into account, details of the PIP for each and every pension arrangement that the individual has must be known. Coupled with the need to research and record individuals adjusted and threshold earnings going forward, the adviser’s role has become more complicated.
However, turning back now to the government’s Green Paper, as per one of the suggestions, future incentive to save toward retirement will not be on the current exempt exempt taxed basis, then these complications may be temporary, albeit likely to be replaced by further complication and need to educate on a radically new system altogether.
