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HMRC internal manual

Pensions Tax Manual

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Annual allowance: transitional rules for tax year 2015-16: pension input amounts: money purchase annual allowance

Trigger event during the pre or post-alignment tax year
Defined benefits and cash balance arrangements
Hybrid arrangements
Example
 

Transitional annual allowance rules apply for tax year 2015-16.

For annual allowance purposes only (including the money purchase annual allowance), the 2015-16 tax year is split into two ‘mini’ tax years - the ‘pre-alignment tax year’ and the ‘post-alignment tax year’ (see PTM058010 for more details).

If a trigger event for the money purchase annual allowance occurs during the pre-alignment tax year the money purchase annual allowance test will apply for both the pre and post-alignment tax years (as well as for subsequent tax years).

If the trigger event occurs in the post-alignment tax year the test will apply for that ‘mini’ tax year only (as well as for subsequent tax years).

PTM056520 has details about the trigger events for the money purchase annual allowance.

Trigger event during the pre or post-alignment tax year

When a trigger event for the money purchase annual allowance occurs in the pre or post-alignment tax year there are a couple of possible situations for pension input periods relating to money purchase arrangements:

  1. There may have been a pension input period that has already ended in the pre-alignment tax year but before the trigger event. For example a pension input period runs from 1 June 2014 to 31 May 2015 and a trigger event occurs on 1 July 2015.
  2. There may be a pension input period that will end in the pre-alignment tax year, or a pension input period that will end in the post-alignment tax year, but (in either case) has not ended when the trigger event occurs.  For example,
* a pension input period ordinarily running from 1 January 2015 to 31 December 2015 is ended on 8 July 2015 under the transitional rules for tax year 2015-16 and a trigger event occurs on 1 May 2015, or
* a pension input period runs from 9 July 2015 to 5 April 2016 and the trigger event occurs on 1 February 2016.

See PTM058040 about pension input periods during the pre and post-alignment tax years.

In the first situation relating to a money purchase arrangement, the pension input amount for the pension input period ending in the pre-alignment tax year is not measured against the £20,000 money purchase annual allowance.  If the money purchase annual allowance is exceeded in a case where there is a pension input amount for a pension input period that ended before the trigger event that pension input amount is tested against the alternative annual allowance (the £20,000 amount here and in the previous paragraph applying for the pre-alignment tax year only, see PTM058030).

In the second situation relating to a money purchase arrangement, the pension input amount for the pension input period is apportioned into the amount that arose up to and including the date of the trigger event and the amount that arose after the trigger event. Only the latter is tested against the money purchase annual allowance (£20,000 for the pre-alignment tax year only and the applicable amount for the post-alignment tax year, see PTM058030).

For the second situation, the way that the pension input amount is apportioned depends on the type of money purchase arrangement:

  • for an other money purchase arrangement (i.e. not a cash balance arrangement) the apportionment is based on the contributions paid during the pension input period, and
  • for a cash balance arrangement, the pension input amount for the arrangement is split proportionally on a time apportionment basis – for example, if the pension input period is 365 days and the trigger event occurred on day 265 of the pension input period, the proportion of the pension input amount that is tested against the £20,000 allowance is 100/365 times the pension input amount.  Note the apportioning is based on the actual pension input amount for the pension input period ending in the pre-alignment tax year and not by reference to the combined pension input amount that might otherwise apply for the annual allowance.

When the money purchase annual allowance is exceeded in a case where the amount tested against that allowance included an apportioned pension input amount, the balance of the pension input amount not tested against the money purchase annual allowance is tested against the alternative annual allowance.

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Defined benefits and cash balance arrangements

Ordinarily, under the transitional rules for tax year 2015-16, for cash balance and defined benefits arrangements there is a combined period covering both the pre and post-alignment tax years.  The pension input amount for the combined period is then apportioned between the ‘mini’ tax years (see PTM058070 for more details).

Where the money purchase annual allowance test has application for either of the pre and post-alignment tax years (or both), a pension input amount for a pension input period relating to a cash balance arrangement might have to be apportioned between pre and post-trigger event input amounts (as described in the Trigger event during the pre or post alignment tax year section on this page).   If so, the apportioning for the money purchase annual allowance is by reference to the actual pension input amount for the cash balance arrangement for the actual pension input period.

If a pension input amount for a defined benefits arrangement has to be taken into account for the purpose of testing ‘other inputs’ against the alternative annual allowance, the relevant apportioned part of the pension input amount for the combined period is used (e.g. if the test is for the pre-alignment tax year the apportioned part of the input amount relating to the pre-alignment tax year is used).

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Hybrid arrangements

If a hybrid arrangement has to be taken into account for the purpose of a money purchase annual allowance test for the pre or post-alignment tax years (or both) the guidance at PTM056550 onwards applies.

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Example

Dwayne has to apply the money purchase annual allowance test for the pre-alignment tax year as a result of first flexibly accessing a money purchase arrangement, the trigger event being on 31 May 2015.

He has two money purchase arrangements, a cash balance arrangement and an other money purchase arrangement.

Had the transitional rules for tax year 2015-16 not applied, the pension input periods for both arrangements would have started on 1 May and ended on 30 April each year.

Due to the transitional rules, for each arrangement, Dwayne has two pension input periods ending in the pre-alignment tax year.  For each arrangement, one pension input period ran from 1 May 2014 to 30 April 2015 and the other pension input period from 1 May 2015 to 8 July 2015.

Dwayne’s pension input amount for his cash balance arrangement for the pension input period ending 30 April 2015 is £22,000.  The pension input amount for the pension input period ending on 8 July 2015 is £5,000.

Dwayne also makes two payments to his other money purchase arrangement of £1,000 on 1 July 2014 and £3,000 on 1 February 2015, giving a pension input amount of £4,000 for the pension input period ending on 30 April 2015 for that arrangement.  He made a contribution of £1,000 on 1 July 2015 to the same arrangement, giving a pension input amount of £1,000 for the pension input period ending on 8 July 2015.

For each arrangement, there is a pension input period ending before and after the trigger event. This means the pension input amounts for each arrangement for the pension input period ending on 8 July 2015 must be apportioned to establish how much of the respective input amounts is tested against the £20,000 money purchase annual allowance for the pre-alignment tax year and that none of the pension input amounts for each arrangement for the pension input period ending on 30 April 2015 are tested against the money purchase annual allowance.

(If Dwayne does exceed the £20,000 money purchase annual allowance for the pre-alignment tax year the pension input amounts for each arrangement for the pension input period ending on 30 April 2015 are tested against the £30,000 alternative annual allowance for the pre-alignment tax year.)

The proportion of the pension input amount for the cash balance arrangement to be tested is £2,753, being £5,000 x 38 (the number of days from 1 June 2015 - the day after the trigger event - to the end of the pension input period on 8 July 2015) divided by 69 (days in the pension input period 1 May 2015 to 8 July 2015).

The proportion of the pension input amount for the other money purchase arrangement to be tested is £1,000, being the amount of contributions paid under that arrangement on or after 1 June 2015 until the end of the pension input period for the arrangement ending on 8 July 2015.

The overall amount which is tested against the £20,000 money purchase annual allowance for the pre-alignment tax year is £3,753 (£2,753 + £1,000). This does not exceed £20,000, which means Dwayne does not have an alternative chargeable amount for the pre-alignment tax year to compare against Dwayne’s default chargeable amount.

Dwayne’s default chargeable amount for the pre-alignment tax year comprises the total amount of contributions paid to his other money purchase arrangement in the pension input periods ending on 30 April 2015 and 8 July 2015, being £5,000 (£3,000 + £1,000 + £1,000), and apportioned part of the pension input amount for his cash balance arrangement for the pre-alignment tax year as based on the pension input amount for the combined period for his cash balance arrangement.

Dwayne’s combined period for his cash balance arrangement comprises pension input periods ending on 30 April 2015, 8 July 2015 and 5 April 2016.  For his cash balance arrangement, the pension input amount for the combined period is £42,000.       

For the pre-alignment tax year, the apportioned part of the pension input amount for the combined period is £25,819, being £42,000 x 434 (the number of days in the combined period of 706 less 272) divided by 706 (the number of days in the combined period, 365 for the pension input period ending on 30 April 2015, 69 for the one ending 8 July 2015 and 272 for the one ending 5 April 2016).

(If Dwayne did have an alternative chargeable amount for the pre-alignment tax year, his default chargeable amount for the same ‘mini’ tax year relating to his cash balance arrangement would still be based on the apportioned part of the pension input amount for his combined period, being £25,819.)