Split pension input periods and the annual allowance
Guidance on working out pension input amounts where they are split due to the change in annual allowance in the 2011 to 2012 tax year.
This guidance is now obsolete, but you can still find out about pension input periods using Pension administrators: check your member’s annual allowance.
Split pension input periods
Split pension input periods exist because the annual allowance for the 2011 to 2012 tax year was originally £255,000 but on 14 October 2010 it was announced that this would be reduced to £50,000. This meant some people had already saved more than £50,000 when the change was announced due to the dates of their pension input period.
To allow for this a modified annual allowance limit applied for the 2011 to 2012 tax year. The annual allowance tax charge does not apply to pension savings of more than £50,000 subject to a maximum of £255,000 as long as those savings were built up before 14 October 2010 for pension input periods ending in 2011 to 2012.
You’ll have a split pension input period if both of the following statements apply to you:
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you have any pension input periods that started before 14 October 2010 and ended in the 2011 to 2012 tax year
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all of your pension savings made in all of your pension input periods that end in the 2011 to 2012 tax year exceeded the annual allowance of £50,000
Guidance on calculating your pension input amounts can be found in the RPSM.
Split pension input periods and exceeding the annual allowance
You can carry forward any unused annual allowance from the previous 3 tax years. The annual allowance limit is £255,000 as long as your pension savings didn’t exceed £50,000 in:
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the period14 October 2010 to the end of the pension input period
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any of your pension input periods that start on or after 14 October 2010 and end in the 2011 to 2012 tax year
You must value your pension savings during the split pension input period to see whether they exceed the modified annual allowance limit.
You must split your pension savings into 2 notional parts:
Part 1: the start of the pension input period to 13 October 2010 – the pre announcement period
Part 2: 14 October 2010 to the end of the pension input period – the post announcement period
Example
Sam made pension savings in two different pension pots that have different pension input periods, each ending in the 2011 to 2012 tax year. Sam’s total amount of pension savings for the 2011 to 2012 tax year is £94,000.
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Pot A – pension input period 1 May 2010 to 30 April 2011 with £70,000 saved in that period
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Pot B – pension input period 1 January 2011 to 31 December 2011 with £24,000 saved in that period.
Sam has a modified annual allowance limit for the 2011 to 2012 tax year because both:
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Sam’s total amount of pension savings of £94,000 for the 2011 to 2012 tax year is more than the annual allowance of £50,000 for that tax year
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Sam has a pension input period ending in 2011 to 2012 that started before 14 October 2010 (the one for Pot A)
Sam’s pension input period for Pot A is split into two parts:
Part 1: 1 May 2010 to 13 October 2010 Part 2: 14 October 2010 to 30 April 2011
Sam’s pension input period for Pot B is not split as, though the pension input period ends in 2011 to 2012, it started on or after 14 October 2010.
For Pot A, in the period 1 May 2010 to 13 October 2010, Sam made pension savings of £60,000 and in the period 14 October 2010 to 30 April 2011 Sam made pension savings of £10,000.
Sam has not exceeded the annual allowance for the 2011 to 2012 tax year. This is because both:
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Sam’s total pension savings (£94,000) has not exceeded £255,000
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Sam’s pension savings for Pot A in the period 14 October 2010 to 30 April 2011 (£10,000) and all of Sam’s pension savings for Pot B (£24,000) together have not exceeded £50,000
Valuing your pension input amounts for a defined benefits arrangement
You work out the your pension savings made in each of the notional pension input periods in the same way as you’d calculate pension input amounts generally.
However, there’s an exception if you’ve a defined benefits arrangement. For these pension savings made in the period:
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from the commencement of the pension input period to 13 October 2010 are valued using a factor of 10 instead of 16
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14 October 2010 to the end of the pension input period are valued by the usual factor of 16
When you calculate the opening value for the pre-announcement period and the post-announcement period a full Consumer Prices Index (CPI) increase is given for defined benefit and cash balance arrangements. CPI is the general index of consumer prices published by the Office for National Statistics. For pension input periods ending in 2011 to 2012 use the 12 month increase in the CPI rate to September 2010 which is 3.1% (1.031).
The examples below provide a simplified example to illustrate how the pension input amount is worked out. For more detailed guidance see the RPSM.
Calculate the pre-announcement period opening value
Step one: Opening value
Number of years’ and days’ pensionable service / accrual rate x pensionable earnings at beginning of pension input period x 10 (valuation factor) x CPI = Result A
Step two: Closing value at the end of the period (to 13 October 2010)
(Number of calendar days from beginning of pension input period to 13 October 2010 / 365 + number of years’ and days’ pensionable service) / Accrual rate x pensionable earnings at 13 October 2010 x 10 (valuation factor) = Result B
If a member’s rights under the arrangement include a separate lump sum in addition to the pension, for example many public sector schemes provide a lump sum without having to give up pension, add the amount of the lump sum to Result A and B but for result A the lump sum must be added in before the CPI adjustment
Step three: Result B – Result A = Result C
Calculate the post-announcement period
Step one: Opening value (from 14 October 2010)
(Number of calendar days from beginning of PIP to 13 October 2010 / 365 + number of years’ and days’ pensionable service) / Accrual rate x pensionable earnings at 13 October 2010 x 16 (valuation factor) x CPI = Result D
Step two: Closing value at the end of the pension input period
Number of years’ and days’ pensionable service / accrual rate x pensionable earnings at end of pension input period x 16 (valuation factor) = Result E
If a member’s rights under the arrangement include a separate lump sum in addition to the pension, for example many public sector schemes provide a lump sum without having to give up pension, add the amount of the lump sum to Result D and E but for result D the lump sum must be added in before the CPI adjustment
Step three: Result E – Result D = Result F
Example 1
Dave is a member of the ABC final salary scheme:
- the scheme provides a pension of 1/60th final pay
- Dave has 30 years and 214 days pensionable service
- the pension input period for the scheme is from 1 May 2010 to 30 April 2011
- his pensionable earnings on 1 May 2010 are £33,000
- his pensionable earnings on 13 October 2010 are £35,000
- his pensionable earnings on 30 April 2011 are £50,000
- Dave does not have any unused annual allowance to carry forward from the previous 3 tax years
- Dave has no other pension arrangements to take into account for the purpose of the annual allowance
- Dave’s pension input amount is £137,994.94.
Pre-announcement period (1 May 2010 to 13 October 2010 – 166 days):
Opening value: 30 + (214/365) / 60 x £33,000 = £16,822.47 x 10 (valuation factor) = £168,224.66 x 1.031 (CPI) = £173,439.62
Closing value: ((166/365) + 30 + (214/365))/60 x £35,000 = £18,107.31x 10 (valuation factor) = £181,073.06
The increase in the pre-announcement period is £181,073.06 - £173,439.62 = £7,633.44
Post-announcement period (14 October 2010 to 30 April 2011):
Opening value:
((166/365) + 30 + (214/365))/ 60 x £35,000 = £18,107.31x 16 (valuation factor) = £289,716.89 x 1.031 (CPI) = £298,698.12
Closing value:
31 + (214/365) /60 x £50,000 = £26,321.92 x 16 = £421,150.68
The increase in the post-announcement period is £421,150.68 minus £298,698.12 = £122,452.57
Deduct £50,000 from the increase in the post-announcement period
£122,452.57 - £50,000 = £72,452.57 – the post-announcement period result
Deduct £205,000 from the increase in the pre-announcement period
NOTE: £50,000 is deducted from the £255,000 amount when the increase in the post-announcement period is £50,000 or more (in this example the increase was £122,452.57). If the increase in the post-announcement period is less than £50,000, that lesser amount is deducted from £255,000
£7,633.44 - £205,000 = nil – the pre-announcement result
(The pre-announcement result is adjusted to nil when the result would otherwise be a negative amount.)
Add the post-announcement result and the pre-announcement result
£72,452.57+ nil = £72,452.57
Deduct any unused annual allowance from the previous 3 tax years
Dave does not have any unused annual allowance to carry forward from the previous 3 tax years
Dave’s chargeable amount 2011 to 2012 is £72,452.57
Although the increase in Dave’s pension savings for 2011 to 2012 has not exceeded £255,000 he has an annual allowance charge because the amount of the increase that occurred in the period starting on 14 October 2010 to the end of the pension input period exceeded £50,000.
Example 2
Glenda is a member of the DCE final salary scheme:
- the scheme provides a pension of 1/50th final pay
- Glenda has 17 years and 192 days pensionable service
- the pension input period for the scheme is from 17 April 2010 to 16 April 2011
- her pensionable earnings on 17 April 2010 are £160,000
- her pensionable earnings on 13 October 2010 are £194,000
- her pensionable earnings on 16 April 2011 are £201,000
- Glenda does not have any unused annual allowance to carry forward from the previous 3 years
- Glenda’s pension input amount is £247,600.18
Pre-announcement period (17 April 2010 to 13 October 2010 – 180 days):
Opening value:
17 + (192/365) /50 x £160,000 = £56,083.29 x 10 (valuation factor) = £560,832.87 x 1.031 (CPI) = £578,218.69
Closing value:
((180/365) + 17 + (192/365)) /50 x £194,000 = £69,914.41 x 10 (valuation factor) = £699,144.10
The increase in the pre-commencement period is £699,144.10 minus £578,218.69 = £120,925.41
Post-announcement period (14 October 2010 to 16 April 2011):
Opening value:
((180/365) + 17 + (192/365) ) / 50 x £194,000 = £69,914.41 x 16 (valuation factor) = £1,118,630.56 x 1.031 (CPI) = £1,153,308.11
Closing value:
18 + (192/365) / 50 x £201,000 x 16 = £1,191,594.08
The increase in the post-announcement period is £1,191,594.08 minus £1,153,308.11 = £38,285.96
The post-announcement period does not exceed £50,000. There is no annual allowance charge.
Deduct £216,714.04 from the increase in the pre-announcement period
NOTE: £38,285.96 has been deducted from £255,000 annual allowance amount because this is the amount of annual allowance used in the post-announcement period. If the post-announcement amount is a lesser amount, that lesser amount would be deducted from £255,000. If post-announcement amount is a greater amount, that greater amount would be deducted from £255,000 up to a maximum of £50,000.
£120,925.41 - £216,714.04 = nil – the pre-announcement result
(The pre-announcement amount is adjusted to nil when the result would otherwise be a negative amount)
Glenda’s total chargeable amount for 2011 to 2012 is NIL
Valuing your pension input amounts for an ‘other money purchase’ arrangement
These are also called ‘defined contribution’ arrangements. With a money purchase arrangement you won’t know in advance how much pension you’ll get when you retire. You build up a pension pot that you use to provide you with your pension. The value of your pot will depend on how much money you contribute and how well the funds are invested. This means the value of your pension will depend on how much pension your pension pot can ‘buy’. It is a feature of ‘other money purchase’ arrangements that the member bears all the investment and mortality risk. The scheme simply pays out whatever benefits the amount in the pot, including the proceeds of all the investments that have been made using the payments into the scheme, will support.
Example
Charlotte saves £20,000 at the end of each month into her personal pension and she also makes a one-off contribution of £5,000 each February. Her pension input period is 1 June 2010 to 31 May 2011.
Charlotte’s pension savings are calculated as follows:
Pre-announcement period (1 June 2010 to 13 October 2010):
Regular contributions of £80,000
Post-announcement period (14 October 2010 to 31 May 2011):
Regular contributions of £160,000 One off contribution of £5,000
Total pension input amount = (£80,000 + £165,000) = £245,000
The annual allowance for the whole period is £255,000 but limited to £50,000 in the period 14 October to 31 May 2011. There is no annual allowance tax charge for the £80,000 pensioncontributions made up to 13 October 2010 as the total contributions in the pension input period (to that date) are not more than £205,000 (£255,000 - £50,000).
NOTE: £50,000 is deducted from the £255,000 amount when the increase in the post-announcement period is £50,000 or more (in this example the increase was £165,000). If the increase in the post-announcement period is less than £50,000, that lesser amount is deducted from £255,000.
For the period 14 October 2010 to 31 May 2011, the maximum annual allowance available is £50,000. So the excess contributions over £50,000 are liable to an annual allowance tax charge if Charlotte has no annual allowance carry forward from three earlier tax years.
Full tax relief is given on savings of £130,000 (£80,000 + £50,000).
Charlotte doesn’t have any unused annual allowance to carry forward and there’s an annual allowance charge on £115,000 (£165,000 - £50,000).
Tax relief for the following tax year (2012 to 2013) will be limited to savings of £50,000.
Further guidance on calculating pension input amounts for pension input periods that began before 6 April 2011 can be found in the RPSM.
Carrying forward unused annual allowance from 2008 to 2011
Because the amount of annual allowance reduced from £255,000 to £50,000 for 2011 to 2012 there are transitional rules for working out how much annual allowance can be carried forward from the tax years:
- 2008 to 2009
- 2009 to 2010
- 2010 to 2011
For the purpose of the carry forward rules, the annual allowance for these tax years is deemed to be £50,000.
More guidance on carrying forward unused annual allowance from 2008 to 2011 can be found in the RPSM.